Q. What exactly is Present Value in relation to a settlement offer? The carrier is making structure offers by quoting present value but won't tell me the cost.

A. Present Value ("PV") is merely an attempt to calculate a value to future payments in today's dollars. The mathematical calculation that is used in determining present value is dependent on the interest assumption (discount rate), which could be entirely arbitrary or could be based on an average. A difference of a percentage point could make a major difference in present value, possibly hundreds of thousands of dollars!

Present Value offers are approximations. Should you rely on it to settle your case, without knowing the assumptions, you won't really know what you are settling for. Consequently, you could end up inadvertently violating your contingency fee agreement by taking more than your share of the proceeds.

In Private Letter Rulings 8333035 and 9017011, the IRS ruled that disclosure by the defendant of the existence, cost or present value of an annuity will not cause one to be in constructive receipt of the present value invested in the (structured settlement) annuity. However, you may encounter one of the diminishing number of defense practitioners who will not disclose the cost, even today, because of the mistaken belief that such disclosure will result in constructive receipt. Today, more states are requiring disclosure for consumer protection. Florida, Massachusetts, Minnesota and New York have statutes requiring cost disclosure concurrent with the creation of a structured settlement. The Florida and Massachusetts statutes require a Present Value ("PV") calculation in the disclosure.

Q. Don't Annuities Give Defendant Unfair Credit?

A. Some opponents of using age ratings purport that the annuity pricing method gives the defendant an unfair "credit" for the degree to which the injury has reduced the plaintiff's life expectancy. Because the plaintiff's life expectancy is reduced, the annuity price is less. While this assertion may have merit in the case of a damage award for future lost earnings, if the injury in fact causes the plaintiff to predecease his pre-injury work life expectancy, it is meaningless in regard to damages for future medical expenses. Recognizing that the goal in awarding damages for future medical expenses is only to provide for such medical expenses, not to punish the defendant, then it is clear that the fact that a shorter life expectancy results in a lower cost does not give the defendant an unfair credit. The lower annuity cost simply reflects the unfortunate and unintended fact that the plaintiff has a diminished life expectancy as a result of the injury or perhaps another pre-existing condition.

Q. Are Annuities Unsafe?

A. Some opponents argue, "there is no guarantee that the annuity company offering the annuity will remain solvent". While it is true that insurance companies, cannot guarantee solvency, just like banks, savings and loans, and other savings institutions, annuities are generally viewed as relatively safe investments. There are practical ways to minimize the risk of insolvency. Choose an insurer after carefully evaluating that company's ratings. Moreover, the risk can be minimized through diversifying a large case among several highly rated insurance companies. Diversification also may bring the total package within the protection offered by state guarantee funds.

Q. We're interested in structuring legal fees and read on another web site "Depending on the time of the deferral, the sole benefit results in an equivocated, guaranteed rate of return at approximately 15%". Seems too good to be true!

A. For a quick chuckle, have a look at your Thesaurus. It will reveal that related words for "equivocate" are: "prevaricate", "beat around the bush", "fudge", "vacillate", "quibble" or "be evasive". What does that lead you to believe?

The statement including the "15%" is obviously dreadfully worded ad copy. One could assume that the author meant the taxable equivalent. However even if our assumption is correct, such a number probably doesn't apply today and should be discounted.

For more information about structuring attorney fees please click here With respect to returns you may also want to review our FAQ on Internal Rate of Return

A. The structured settlement proposals that you are likely to see contain an IRR or Internal Rate of Return number which is reflected as a percentage return. Theoretically this allows you to find an interest rate that is equivalent to the returns on the amount of consideration (premium) that is used to fund your structured settlement. Once you know the rate, you can compare it to after-tax rates that you might earn by opting for other structured settlement plans, or that you might achieve by taking cash and investing in different taxable or tax-exempt financial instruments. Clearly the IRR is useful to help determine the best value for money while taking into account need for absolute certainty, available resources, tolerance for the investment risk of the alternatives, needs as to timing and amount of payments and other factors.

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. From time to time we see a competitor's or an annuity issuer's proposals showing a single high IRR on someone with a very high rated age (severely impaired life expectancy). When we perform our calculations they reveal that the proposal assumes that the annuitant lives a normal life expectancy ("NLE"). This could be unrealistic in and of itself. We are aware that annuity issuers' software calculates the IRR based on different mortality tables. As an example the 2001 Commissioners Standard Ordinary Mortality Table gives an unimpaired 40 year male 37.36 years to live (or to age 77.36) and a 40 year old female 41.03 years to live (or to age 81.03). Yet the IRR calculator of one annuity issuer that we are aware of had a to age 85 or age 86 life expectancy from which to measure the IRR for a 40 year old male. With a life contingent payout, an increase in the length of the payment period results in a higher IRR.

Despite the possibility that the annuitant may not live to NLE is reflected in the pricing of the structured settlement, the potential of a near term or intermediate term death is often not reflected in the IRR on some proposals. If your broker, or the person in his/her office creating the proposal, is simply transposing the numbers from an annuity issuer, with NLE mortality assumptions in their IRR calculator, the IRR numbers may be inflated and not useful for comparison.

In cases with impaired risk annuitants we suggest running the IRR calculations at various milestones past the structured settlement's period certain through a standard NLE. Doing this should clean up the discrepancy that may exist between proposals of annuity issuers who may use different mortality tables in the IRR calculation tool within their software and also give the plaintiff, counsel and beneficiaries a better frame of reference.

Q. What Do Periods of Lower Interest Rates Mean for Structured Settlements?

A. Even during periods of lower interest rates there is generally a wide spread between structured settlement annuities and treasuries as well as corporate bonds of similar credit quality. The tax leverage afforded by a structured settlement still applies. When the economy is slowing or the stock market is volatile, it is wise to shift a portion of your assets into fixed income, which is what a structured settlement provides. Even in a growing economy those who cannot accept volatility in investment returns or have an absolute need for income will benefit from a structured settlement. The variable structured settlement*, for those with suitable risk tolerance is also an option (when packaged with a traditional structure as required by underwriting rules).

Structured settlements offer peace of mind, safety, tax leverage and a competitive rate of return.

* note that variable structured settlement products are offered only by prospectus and through structured settlement brokers, affiliated with a broker dealer, who hold the appropriate insurance and securities licenses and appointments.

Q. Why do females receive less lifetime monthly income from a structured annuity than a males of the same age and health status , and having the same annuity cost?

A. Statistics show that females have a longer life expectancy than males. Think of annuities as "income insurance". Since the period over which females are "insured" is statistically longer, it follows that the cost of that "income insurance" is higher. Thus the income per dollar of funding is less. The reverse happens with other financial protection products, such as life insurance, where the cost of insurance is less because a female has a statistically lower mortality risk.