by John Darer CLU ChFC MSSC CeFT RSP CLTC
Structured Settlement Rate of Return Tips
If you receive a structured settlement illustration from a structured settlement broker or settlement planner bearing a rate of return nosing toward 7%, chances are someone’s got an extreme case of “Puffery the Magic Dragon”
In the last six months I’ve observed fantastical numbers on proposals with my own eyes where such returns have been mischaracterized by such terms as “tax free rate of return” or “Internal Rate of Return” when what may be displayed is a taxable equivalent yield.
What is the Internal Rate of Return (IRR) of a Structured Settlement?
The Internal Rate of Return is a common financial technique used determine an investment’s rate of return. The use of the term “internal” indicates that that the calculation disregards external elements, including the risk-free rate, inflation, cost of capital and financial risk. IRR can vary based on the inputs and it is reasonable to assume that each cash flow may have a different IRR.
- Flaws in proposals may include masking a lower IRR on a shorter term cash flow in a series of payment streams by using a composite IRR that blends them all together.
- On lifetime payouts with a certain period, comparing lifetime IRR’s with different companies that use different mortality tables.
What is the Taxable Equivalent Yield (TEY) of a structured setlement?
The taxable equivalent yield is useful to compare tax-free investments to taxable alternatives. It should be noted that the taxable equivalent yield varies by the inputs.
Here is a link to a chart produced by 4structures.com LLC that may be helpful to structured settlement consumers and attorneys.
Tax Advantages of Structured Settlements | Taxable Equivalent Yield Chart
Every structured settlement consultant has accress to quoting software for each of the life insurance companies that issue structured settlement annuites they are appoited with
- Each software has a built in internal rate of return (IRR) calculator.
- The IRR can be calculated and illustrated for each cash flow and should be illustrated for each cash flow.
- It also reveals the sweet spot for the carrier. You might discover that a lump sum in 15 years pays a higher IRR than a lump sum in 20 years.
- Each software typically has the ability to show the taxable equivalent yield. Such display requires one to enter a tax bracket
Key Takeaway
Taxable Equivalent Yield
IS NOT
A TAX-FREE RATE OF RETURN
LITERALLY READ
“Taxable Equivalent”
If a minor is scheduled to receive a single lump sum at age 18 (i.e. one and done!), why is it relevant to show a life expectancy of 84 years as has been seen?
If there is a lump sum payable to a minor at age 18 why would you assume a tax bracket of more than 30% on a modest lump sum payment?
There are free online calculators that help you figure out what the tax might be. If you make $50,000 a year living in California Understand your avaerage tax rate and your marginal tax rate The marginal tax rate means teh rate that your immediate additional income will be taxed at this rate.
For example, you can use the California Income Tax Calculator – SmartAsset, or California Tax Calculator 2026 | iCalculator™ US to estimate how much tax you might pay on your taxable income. Your tax is $0 if your income is less than the standard deduction.
What Does the Standard Deduction Mean?
The standard deduction is a predetermined dollar amount that taxpayers can deduct from adjusted gross income to lower their taxable income. It is available to individuals who choose not to itemize deductions, and the deductible further varies based on filing status and other relevant factors, such as whether you’re over age 65 and/or blind.
IRS releases tax inflation adjustments for tax year 2026 | Internal Revenue Service
Be sure to read the disclaimers on any online calculator you use and seek professional tax advice.