by John Darer® CLU ChFC MSSC RSP CLTC
A structured settlement can be paid to plaintiffs, or to attorneys or law firms who are structuring legal fees, in several different ways, index linked structured settlement payments, a standard fixed annual increase or level structured settlement payments. For purposes of comparison I assumed a 45 year old female with a structured settlement funding amount of $1,000,000; a 25 year certain and life annuity, starting at $2,396.07 monthly and hypothetical S&P point to point returns of 10%, -10%, 6% and 3% for illustrative purposes on the index linked structured settlement annuity with Pacific Life Insurance Company (or Pacific Life and Annuity Company, if in New York) used for the exercise.
| End of Year | 1 | 2 | 3 | 4 |
| Hypothetical S&P 500 index return | 10% | -10% | 6% | 3% |
| Adjustment to Payment Amount | 5% | 0% | 5% | 3% |
| Resulting Monthly Annuity Payment | $2,515.87 | $2,515.87 | $2,641.66 | $2,720.91 |
Now let's look at a different S&P 500 scenario that starts off negative -8%, 3%, -12%, 7%
| End of Year | 1 | 2 | 3 | 4 |
| Hypothetical S&P 500 index return | -8% | 3% | -12% | 7% |
| Adjustment to Payment Amount | 0% | 3% | 0% | 5% |
| Resulting Monthly Annuity Payment | $2,396.07 | $2,467.95 | $2,467.95 | $2,591.35 |
Now keeping the structured settlement funding cost the same, let's try it with a fixed COLA of 2.26% Starting at $2,395.13 monthly
| End of Year | 1 | 2 | 3 | 4 |
| Fixed COLA | 2.26% | 2.26% | 2.26% | 2.26% |
| Adjustment to Payment Amount | 2.26% | 2.26% | 2.26% | 2.26% |
| Resulting Monthly Annuity Payment | $2,449.26 | $2,504.61 | 2,561.22 | $2,619.10 |
Now in the table compare those two to a simply level payment plan, with no COLA, using the same funding amount with a monthly payout for life of $3,565.84, with 25 years certain, that is unaffected by what happens to the S&P 500.
| End of Year | 1 | 2 | 3 | 4 |
| Adjustment to Payment Amount | 0% | 0% | 0% | 0% |
| Monthly Annuity Payment | 3,565.84 | $3,565.84 | $3,565.84 |
$3,565.84
Obviously more extensive analysis is needed that takes into account other scenarios on the index linked option and is specifically tailored to a person's needs, While the indexed linked could prove to be better in the long run, there are no guarantees to the up side and there is a cap.There are years where there could be a zero return where benefits stay the same and you start out "the race" with a lower amount. For this reason it should only be considered by those with a long time horizon. |
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