Should Structured Settlements be Used in a Low Interest Rate Environment?

Submitted by Abbey Hudson on Fri, 11/18/2016 - 14:04

Structured settlement annuities provide guaranteed, income tax-free payments to claimants receiving settlement funds as a result of a physical injury or illness. As part of a comprehensive settlement plan, these annuities help provide a stable and secure financial future for these injured claimants. Some would argue that structured settlements provide less value in a low rate environment, but that couldn’t be further from the truth. The financial security, income tax-free status and flexibility of a structured settlement provides predictable, guaranteed cash flow in any rate environment, and that can be invaluable to the injured party.

Because these plans are designed to cover real future expenses, the importance of the return on investment is often secondary to the ultimate goal of the structured settlement - to replace lost income, cover future medical expenses, establish college funds or any other financial scenarios the claimant anticipates. This is especially true for those who have suffered catastrophic injuries. Making sure that money is available when the claimant needs it most is often significantly more important than purchasing a high interest rate investment which may, in fact, put the settlement funds in jeopardy if the market doesn’t perform well or the money is poorly managed.

In a low rate environment, it’s important to remember that structured settlement funds are not only protected from market volatility, they also offer income tax-free payments to the claimant. Any gains on alternative investment would generally be taxable – other financial vehicles would ultimately need to have even higher returns to make up for the tax advantage of a structured settlement annuity. In addition, structured settlements require no on-going management or advisor fees. For claimants that don’t have the time, interest or financial experience to manage a large lump sum, structured settlement annuities can be an essential part of their settlement plan.

In addition to these benefits, the design flexibility itself adds value because future distributions can be designed to account for medical needs, income loss and personal expenses of each individual claimant. A knowledgeable structured settlement consultant can create a plan designed to meet the specific requirements of each client, including increasing benefits over time to account for inflation. Cost of living increase adjustments (“COLAs”), payment streams tied to a market index, or multiple lump sums with increasing benefits can help offset any concerns the claimant might have about protecting their financial interests going forward.

Advisors that dismiss structured settlements based on interest rates alone may not be aware of the potential benefits of incorporating a structured settlement into long-term financial planning. Structured settlements are the only solution that offer a secure payment stream and income tax-free benefits for the full life of the annuity. No one expects to be injured in an accident, and few realize how such an event can completely upend their lives.  Establishing a profoundly secure and tax-beneficial source of future income at the time of settlement goes a long way toward getting injury victims and their families back on their feet again. A structured settlement can be a valuable part of an inclusive settlement plan.