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 us the 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?
After determining the internal rate of return of the structured settlement proposal, you can evaluate it against the after-tax rates potentially earned from alternative structured settlement plans or by taking a lump sum and investing in various 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 lifetime payments are illustrated, 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 remaining monthly payments of 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
- Tax Advantages of Structured Settlements | Taxable Equivalent Yield Chart
- Internal Rate of Return (IRR): Formula and Examples Investopedia
Last updated August 22, 2025
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