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September 11, 2008

Structured Settlement Internal Rate of Return

by John Darer CLU ChFC MSSC CeFT RSP CLTC

Define structured settlement internal rate of return. If you asked the question of different structured settlement consultants would they come up with different answers?

What is structured settlement IRR?

The structured settlement internal rate of return is the result of a mathematical formula that generates an interest rate that is equivalent to the effective compounding rate on invested capital (i.e. the structured settlement funding amount or premium).

How is structured settlement IRR useful?

Once you know the internal rate of return of the structured settlement proposal, you can compare it to after-tax rates that you might earn by opting for other structured settlement plans, or that you might achieve by taking cash and investing in different taxable or tax-exempt financial instruments.

Caveat 1

To calculate the structured settlement IRR you need the following components

  • Consideration (amount of initial investment)

  • Amount and timing of each cash flow

The results can be very easily misinterpreted and/or misrepresented.

Care should be taken by Plaintiffs and counsel to understand how the IRR is calculated in a structured settlement proposal where lifetime payments are being considered, and there is a plaintiff /annuitant with reduced life expectancy, so an effective comparison can be made.

For example a structured settlement planner quotes an annuity that will pay a 30 year old paraplegic $4,000/month for life with 300 monthly payments certain and tells you that the rate of return is 5.75% tax free. What is wrong and/or missing from the planner's statement?

Answer:
If the structured settlement planner has simply quoted the IRR off the insurance company software, chances are high that the IRR is a number achievable only if the plaintiff lives through normal life expectancy (NLE). If the plaintiff dies before 300 monthly payments are paid, the most that could be paid out is the 300 monthly payments. Therefore when using the IRR to evaluate the "opportunity cost" one should also assess what the IRR would be if the plaintiff dies within the certain period. Because a plaintiff may live longer than normal life expectancy the most useful opportunity cost analysis would include the IRR calculated at various hypothetical "live until" ages.

Caveat 2
When comparing the IRR on alternative investments to a structured settlement IRR, be sure that the IRR on the alternative investment  takes into account all investment charges including, if applicable, surrender charges and commissions on both the acquisition and disposal (buying or selling) of the alternative investment.

In a September 20, 2007 published opinion, in response to this author's inquiry, the New York State Insurance Department stated that "although there is no affirmative requirement that an agent or broker substantiate a claimed rate of return, the Insurance Law prohibits the making of misleading statements or misrepresentations regarding life insurance and annuities".

Further Reading

The Internal Rate of Return: Economics Interactive Lecture Samuel L. Baker University of South Carolina  Arnold School of Public Health March 28, 2006

Posted at 03:01 PM in Albany New York Structured Settlements, Annuity FAQ, Bronx New York Structured Settlements, Brooklyn New York Structured Settlements, Buffalo New York Structured Settlements, Chicago Illinois Structured Settlements, Connecticut Settlement Planning, Conshohocken Structured Settlements, Hartford CT Structured Settlements, Lexington KY Structured Settlements, Long Island NY Structured Settlements, Los Angeles CA Structured Settlements, Maryland Structured Settlements, Missouri Structured Settlements, New Jersey Structured Settlements, New Orleans Louisiana Structured Settlements, New York Personal Injury, New York Settlement Planning, New York Structured Settlements, Newburgh Structured Settlements, NH structured settlements, NJ Structured Settlements, Non Qualified Structured Settlements, North Carolina Structured Settlements, NYC Structured Settlements, Oklahoma Structured Settlements, Palm Beach Structured Settlements, Periodical Payments (UK), Philadelphia PA Structured Settlements, Rhode Island Structured Settlements, Rochester Structured Settlements, Sacramento Structured Settlements, San Francisco Structured Settlements, Santa Monica Structured Settlements, Sarasota Structured Settlements, Structured Annuity, Structured Settlement Information, Structured Settlement IRR, Structured Settlement Rate of Return, Structured Settlements in Georgia, Structured Settlements in Illinois, Structured Settlements in Kentucky, Time Value of Money, Tulsa Structured Settlements, TX structured settlements, Washington Structured Settlements, West Virginia Structured Settlements, White Plains Structured Settlements, Wrongful Termination, WV Structured Settlements |

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Guide to Structured Settlements 2024

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  • Top Structured Settlement Annuity Companies 2024
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  • Treasury Funded Structured Settlements
    Treasury Funded Structured Settlements are a settlement option for the most conservative using the OTHER permissible qualified funding asset under IRC 130(d), United States Treasury Bonds in addition to, or instead of, structured settlement annuities. Treasury Funded Structured Settlements can also be used to fund installment sales, also known as structured sales and other non qualified structured settlements.
  • Compare Structured Settlement IRR to Other Settlement Alternatives
    Use the Taxable Equivalent Yield chart to help compare the Internal Rate of Return (IRR) of a structured settlement to other alternative or complementary investments. Need help with the chart? Call 4structures.com® LLC at 888-325-8640
  • Structured Settlement Payments | Types of Structured Settlements 2024
    Ways You Can Structure Your Settlement Payments in 2024. With a structured settlement you can have more than one type of payment in a single contract. Different types of structured settlement payments can be customized and combined to meet your needs on a stand-alone basis, or in conjunction with other financial products. Diversify your structured settlement, if you wish, by funding with more than one annuity issuer, with treasury funded structured settlements, index linked structured settlement payments and market based structured .
  • Structured Attorney Fees for Tax Deferral for Attorney Contingency Fees
    Structured attorney fees is a financial strategy that offers a unique way to defer taxes for lawyers and law firms. Lawyers CAN structure their legal fees even if the plaintiff doesn't structure their settlement. There are multiple ways to structure your attorney fees, such as capped or uncapped index linked structured settlement annuities where payments are adjusted based on upside changes in the S&P 500 or another index, Trial Lawyers may also use a special deferred pay/deferred compensation arrangement, if market based returns returns are desired with no cap. Plan NOW for year end! Put structured attorney fee expert John Darer® on your settlement planning team in 2024.
  • Structured Settlement Annuity Company Customer Service Phone Numbers
    Receiving structured settlement payments from your own structured settlement or inherited structured settlement? You'll like this huge time saver. Click the title for a link to a comprehensive list of customer service telephone numbers that includes both current AND former structured settlement annuity issuers and reinsurers. If you have simple bank or beneficiary changes, or if the insurance company that issued the structured annuity has merged, sold or spun off its block of structured annuity business (e.g. Aviva, Allstate, Transamerica, AEGON, GE Capital, Liberty, CNA, Confederation Life), oran annuity issuer has changed its name and you're trying to track them down. Here you go! The list is regularly updated. Last updated May 20, 2024.
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  • What Are Structured Settlement Annuities?
    Structured settlement annuities are annuities that can provide one or more customized annuity payment streams in a single contract. Read about structured settlement annuities here.
  • History of Structured Settlements
    Tracing the roots of structured settlements history from 1918, when Congress exempted damages for personal injury or sickness from income tax, to the establishment of structured settlements as a core personal injury settlement planning tool to the present day.
  • What Are Market Based Structured Settlements?
    Market based structured settlements are an alternative or supplementary structured settlement solution for the plaintiff, attorney or law firm that: 1. Can afford to take some market risk 2. Have discretionary settlement dollars. Claimants and attorneys alike may find that market-based structured settlements provide the opportunity to receive tax-free income, or tax-deferred income, while enjoying growth potential.
  • iStructure |Uncapped Fixed Index Structured Settlement Annuity
    iStructure is an innovative game changing fixed index structured settlement annuity for plaintiffs or attorneys. with an intermediate to long term horizon
  • Structured Settlements and Longevity Risk| What Are the Odds?
    Do your financial resources give you enough road, or will the road run out before you do? A structured settlement annuity helps mitigate the risk of outliving your savings, no matter how long you live. A structured settlement can include one or more customized payment streams and types.

Qualified Settlement Funds

  • What is a Qualified Settlement Fund?
    Qualified Settlement Funds | What You Need to Know
  • Firmwide Qualified Settlement Funds Debunked
    Firmwide qualified settlement funds have been heavily promoted to trial lawyers, but have been debunked in a detailed analysis in a July 2022 legal opinion a tax partner at the law firm of Faegre Drinker Biddle & Reath, LLP. Trial lawyers and firms who have established Firmwide QSFs or coinsidering establishing a Firmwide QSF should read the analysis as part of their evaluation.

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  • New York Insurance Advertising law requires the full name of the Insurer to be listed along with the city and state of the principal office. Stating that you represent these fine companies using Insurance company logos without the preceding information are also illegal
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Why Take a Structured Settlement?

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