It has been ten years since the financial meltdown of 2008. Even though most investors who stayed the course saw their assets rebound in value by the the middle of 2009, interest rates in general still haven’t really recovered.
Low interest rates are good for businesses and borrowers such as homeowners. However, when a person with a settlement decides to structure payments with a fixed guaranteed structure, the prevailing interest rates matter a lot.
The current yield on 30-year structured settlement paper is 3.07%. To put that in perspective, interest rates were 5.21% in 2007. A structured settlement for an ironworker we represented that was funded with $500,000 provided a healthy income of $2,828 per month. That same monthly payment costs $606,377 today.
Does this mean all structures are worthless or obsolete? Not at all. Each individual should weigh the alternatives with the help of an expert. For many clients who didn’t choose to structure in 2007, they likely panicked when the market crashed and they lost 40% of their settlement. This scenario highlights one key factor in planning, which is the guarantee. What is the value of a guarantee? How do you protect yourself or your client from overspending, which is the #1 risk in personal injury and employment-related settlements?
It’s Not All About Interest Rates
In my career, the companies I have founded and owned have put in place over $2 billion in structured settlements. We know about the context of interest rates and what is right for families. Our work has spanned since 1999, through the September 11th terrorist attacks, the Victim Compensation Fund, and our national effort to create and legislate pro bono structured settlements. What we learned through all of this work is that an interest rate isn’t the only determining factor. Family circumstances, experience in investing, and likelihood to spend cautiously are all real considerations that must weigh on the final decision.
Home building is an example of what has transpired in other industries. When the cost of lumber spikes, it has a dampening effect on building and makes homes more expensive. People still build homes though. Personal injury victims still likely need to shelter their assets so they have protection for life. However, they may not need to do it in a traditional structured settlement.
Is ‘Refinancing’ a Structured Settlement Possible?
What if you or your client could “refinance” a structure? Historically it has not seemed possible, but it turns out, they can. By relying on longstanding tax guidance from the IRS, structured settlement contracts allow for payments to be backed by equities or treasuries. If structuring a settlement is the right thing for all the right reasons (except interest rates), it’s possible to design a periodic payment backed by equities and treasuries, a 50/50 model portfolio for example.
The problem is that the insurance companies settling cases and their brokers are stuck in 2007. They don’t want to innovate. By using independent assignment companies, families can get the best of both worlds: a lifetime exemption in income, earnings and capital gains, and the ability to take advantage of higher interest rates when it makes sense.
The bottom line? Fixed guaranteed structured settlements might be used when the costs for creating a complex trust makes it impractical. (Exceptions are settlements for children, severely impaired clients, or clients with very large recoveries in excess of $3 million.)
So, what should families recovering a settlement do? Working with an expert settlement planner will yield a plan that takes into consideration what is best for the family over the long haul. They may not need a structured settlement at all. If you’re in this situation, be sure the expert you choose to work with is unbiased. If all they do is sell structured settlement annuities, you are not likely to get a complete picture of all of your settlement options. A comprehensive settlement planner with a holistic approach will review and explain all your options.
A West Point graduate where he served as captain and military aviator, John Bair continues his commitment to our country through his efforts within the settlement planning industry. He has represented families of victims lost in the Flight 3407 crash, offered pro bono services to the families of 9/11 victims and drafted the first consumer protection bill for plaintiffs (H.R. 3699).