Settlement Options

What settlement option is best? Here is a comparison of various settlement possibilities:

Cash
Mutual Funds
Certificates of Deposit
Municipal Bonds
Treasury Securities
Bank Trust


Structured Settlement vs. Cash

Structured Settlement Investing Cash
Guaranteed, tax-free payout Not guaranteed
No investment worries. Peace of mind that comes with a plan guaranteed by a billion-dollar life insurance company Interest income taxable
No fees or commissions Subject to risks/volatility of the stock market
A plan custom designed for your needs Subject to substantial expenses and commissions with every purchase and when changes (trades) are made
A life income (tax-free), that you cannot outlive
Substantial monies available in adult life for investment
The worries/stresses of investing a large lump sum are eliminated

Structured Settlements vs. Equity Mutual Fund: A Side-by-Side Comparison

Issue/Concern Structured Settlement Equity Mutual Fund
What types of securities/insurance products support the payments?

A fixed annuity contract issued by a life insurance company. An investment company operates the fund, pooling the assets of many investors and investing in equity securities.
Can this option provide a stable, lifetime income? Yes. Payments and distribution schedule are determined up front. Can provide a dependable, predictable income stream that you cannot outlive. Historically, equities have shown the greatest potential for long-term growth. But they also entail a higher degree of investment risk, which means they may not be a reliable source for ongoing income needs. Earnings may stop altogether if fund performs poorly.
Is there a guarantee with this option? Yes. The annuity issuer guarantees payments, according to the terms of the Structured Settlement agreement. No. Share prices and returns will fluctuate with investment performance.
What are the costs and fees associated with this option? No additional cost to annuitant. Management and expense fees cover the costs of managing the fund and are deducted from returns. Fund may also charge a front- or back-end "load" (i.e., sales charge), redemption fees (paid by investors when they "redeem," or sell shares) and 12b-1 charges.
Will this option keep pace with inflation? A cost-of-living adjustment (COLA) feature is available that can help offset the effects of inflation. This option must be elected when you purchase your annuity. Designed for long-term growth. Historically, a good choice for keeping up with inflation. Total return will depend on the performance of underlying securities. Past performance is not an indicator of future results.
What are the tax consequences? Income provided by a qualified Structured Settlement is TAX-FREE, provided the damages received as periodic income (other than punitive damages) are the result of personal physical injuries or physical illness.
 Taxes must be paid as income is earned and distributed. Capital gains or losses from sales of mutual fund shares have additional tax consequences.
Is this option affected by market fluctuations? No. Benefit payments are determined and fixed at the time the annuity contract is issued.
 Fund yield, share price and return will vary, depending on market conditions. You may have a gain or a loss, depending on when you sell your shares.
Can I make changes to this option after I select it? No. The payment amount and schedule are fixed and may not be changed or accelerated. Money can be withdrawn or moved from one mutual fund to another. Charges, fees and taxes may apply to each transaction.

Structured Settlement vs. Municipal Bonds: A Side-By-Side Comparison

Issue/Concern Structured Settlement Municipal Bonds
What types of securities/insurance products support the payments? A fixed annuity contract issued by a life insurance company. Debt instruments issued by state or local government entity to finance capital expenditures.
Does this option provide a stable, lifetime income? Yes. Payments and distribution schedule are determined up front. Can provide a dependable, predictable income stream that you cannot outlive. Since the coupon - or rate of payment - of the bonds is known in advance, investors may have a reliable income stream (see guarantee section below). Bond must be held to maturity to receive the face value, or par amount, of the bond.
Is there a guarantee with this option? Yes. The annuity issuer guarantees payments according to the terms of the Structured Settlement agreement. Guarantee is based on the claims-paying ability of the issuer. Interest is guaranteed only for the initial investment period. If interest rates fall, fixed maturity dates may force investors to reinvest principal and any accrued interest at a time when interest rates are low, shrinking their income. Municipal bonds may have a "call" feature, allowing them to be redeemed prior to the stated maturity date. Bonds are usually called early when interest rates have fallen, effectively refunding investor principal at a time when reinvestment options reflect lower rates.
What are the costs and fees associated with this option? No additional cost to annuitant. Issued at face value.
Will this option keep pace with inflation? A cost-of-living adjustment (COLA) feature is available that can help offset the effects of inflation. This option must be elected when the settlement is designed. Does not provide a hedge against inflation.
What are the tax consequences? Income provided by a qualified Structured Settlement is TAX-FREE, provided the damages received as periodic income (other than punitive damages) are the result of personal physical injuries or physical illness or wrongful death. Generally, interest is exempt from federal income tax. May also be exempt from state and local taxes in state of issue.
Is this option affected by market fluctuations? No. Benefit payments are determined and fixed. Yes. Value will be affected by interest rate fluctuations and municipality’s stated call options.
Can I make changes to this option after I select it? No. The payment amount and schedule are fixed and may not be changed or accelerated. Yes. If sold or redeemed prior to maturity, value is subject to market conditions. Investors may receive more or less than they paid, resulting in a potential capital gain or loss.

Structured Settlement vs. Certificate of Deposit: A Side-by-Side Comparison

Issue/Concern Structured Settlement Certificate of Deposit (CD)
What types of securities/insurance products support the payments? A fixed annuity contract issued by a life insurance company. A debt instrument issued by a bank. Maturity options range from a few weeks to several years.
Does this option provide a stable, lifetime income? Yes. Payments and distribution schedule are determined up front. Can provide a dependable, predictable income stream that you cannot outlive. No. Pays a fixed rate of interest that accumulates in the account for the duration of the CD. Relatively low returns and penalties for early withdrawals make CDs inefficient for providing an adequate income stream.
Is there a guarantee with this option? Yes. The annuity issuer guarantees payments as provided by the terms of the Structured Settlement agreement. Guarantee is based on the claims-paying ability of the issuer. Yes. The Federal Deposit Insurance Corporation (FDIC) insures CD deposits (up to $100,000). The issuing bank guarantees amounts over $100,000.
What are the costs and fees associated with this option? No additional cost to annuitant. No commissions apply, although there is a penalty for early withdrawal of funds.
Will this option keep pace with inflation? A cost-of-living adjustment (COLA) feature is available that can help offset the effects of inflation. This option must be elected when the settlement is designed. Unlikely, since CDs are considered a low-risk/low-yield investment.
What are the tax consequences? Income provided by a qualified Structured Settlement is TAX-FREE, provided the damages received as periodic income (other than punitive damages) are the result of personal physical injuries or physical illness or wrongful death. Earnings are fully taxable.
Is this option affected by market fluctuations? No. Benefit payments are determined and fixed. Yield will depend on interest rates, which are determined by competitive forces in the market. These tend to be short-term investments that may actually produce a lower income if interest rates decline.
Can I make changes to this option after I select it? No. The payment amount and schedule are fixed and may not be changed or accelerated. Although it is possible to withdraw assets prior to maturity, there generally is a penalty for early withdrawal.

Structured Settlement vs. US Treasury Securities (T-bills, Notes and Bonds):
A Side-By-Side Comparison

Issue/Concern Structured Settlement US Treasury Securities
What types of securities/insurance products support the payments? A fixed annuity contract issued by a life insurance company. A debt instrument issued by the US government and sold as securities to investors.
Does this option provide a stable, lifetime income? Yes. Payments and distribution schedule are determined up front. Can provide a dependable, predictable income stream that you cannot outlive. Yes. Available with a wide range of maturities, Treasuries offer predictable income and repayment of principal in full if held to maturity.
Is there a guarantee with this option? Yes. The annuity issuer guarantees payments according to the terms of the Structured Settlement agreement. Guarantee is based on the claims-paying ability of the issuer. Considered among the safest of all investments because payment of interest and principal at maturity is guaranteed by the full faith and credit of the US Government.
What are the costs and fees associated with this option? No additional cost to annuitant. Considered among the safest of all investments because payment of interest and principal at maturity is guaranteed by the full faith and credit of the US Government.
Will this option keep pace with inflation? A cost-of-living adjustment (COLA) feature is available that can help offset the effects of inflation. This option must be elected when the settlement is designed. Does not provide a hedge against inflation.
What are the tax consequences? Income provided by a qualified Structured Settlement is TAX-FREE, provided the damages received as periodic income (other than punitive damages) are the result of personal physical injuries or physical illness or wrongful death. Subject to Federal taxes, but exempt from state and local taxes.
Is this option affected by market fluctuations? No. Benefit payments are determined and fixed. If Treasuries are held to maturity, investors receive the full face value - regardless of market conditions. If sold prior to maturity, value is subject to market conditions. Investors may receive more or less than they paid, resulting in a potential capital gain or loss.
Can I make changes to this option after I select it? No. The payment amount and schedule are fixed and may not be changed or accelerated. An active secondary market provides liquidity. There may be a gain or loss if bond is sold or redeemed prior to maturity.

Structured Settlement vs. Bank Trust: A Side-By-Side Comparison

Issue/Concern Structured Settlement Bank Trust
What types of securities/insurance products support the payments? A fixed annuity contract issued by a life insurance company. For cases involving incompetent individuals, minors or serious injuries, investments may be restricted to federally insured products (i.e., certificates of deposit). For others, any investment may be used – fixed income, stocks, bonds, and mutual funds. These securities are NOT F.D.I.C. insured.
Does this option provide a stable, lifetime income? Yes. Payments and distribution schedule are determined up front. Can provide a dependable, predictable income stream that you cannot outlive. Any income or return will depend on the type and performance of the underlying investments.
Is there a guarantee with this option? Yes. The annuity issuer guarantees payments according to the terms of the Structured Settlement agreement. Guarantee is based on the claims-paying ability of the issuer. Federal Deposit Insurance Corporation (FDIC) insures up to $100,000 on Treasuries and C.D.’s. Any other investments are NOT guaranteed.
What are the costs and fees associated with this option? No additional cost to annuitant. Bank management fee of 1-1.25% of asset value per year, every year.

Transaction processing costs for securities purchases. Management fees from the various securities in which the Trust invests (i.e. 12(b) 1 fees on mutual funds).
Will this option keep pace with inflation? A cost-of-living adjustment (COLA) feature is available that can help offset the effects of inflation. This option must be elected when the settlement is designed. It depends on the performance of the underlying securities
What are the tax consequences? Income provided by a qualified Structured Settlement is TAX-FREE, provided the damages received as periodic income (other than punitive damages) are the result of personal physical injuries or physical illness or wrongful death. Generally, income generated is FULLY TAXABLE (except some income from tax-free municipal bonds). Capital gains taxes may apply when securities are sold.
Is this option affected by market fluctuations? No. Benefit payments are determined and fixed. Payment amounts are fixed, but how long they last may be affected by the performance of the underlying securities.
Can I make changes to this option after I select it? No. The payment amount and schedule are fixed and may not be changed or accelerated. It depends on the types of securities and the terms of the trust. Payments may be withheld at Trustee’s discretion.
J. Hadus & Associates, Inc. does not give tax or legal advice.
Be sure to consult your own tax or legal professional.