by John Darer® CLU ChFC MSSC CeFT RSP CLTC
Attorneys or law firms who are interested in structured legal fees, backed by an annuity, can do so 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. |