As A Hedge Against Inflation, Structured Settlement Annuities Fail Miserably


When you settle your personal injury lawsuit, you will be bombarded with proposals for structured settlement annuities by the liability insurance company. Make no mistake about it, annuities are big business for liability insurers. The liability insurance companies can profit from your settlement “on the back end” by selling you a structured annuity. But is a structured annuity the best move for you?

As a hedge against inflation, structured settlement annuities fail miserably. Over the past 25 years, inflation has averaged 4.43% per year, which means that the buying power of your money is diminished by 4.4% per year. This means that just to maintain the earning value of your money, you must get an annual return on investment that is equal to the rate of inflation, or 4.43% per year.

As a result of historically low-interest rates, the life insurance companies that issue structured annuities are hard-pressed to match the average rate of inflation. While every case varies with the “rated age” assigned to a personal injury victim by the annuity provider, the rates of return on structured annuities range today from less than one percent to four percent (if you’re lucky). With an annual rate of return somewhere between one and four percent (in the majority of cases), structured annuities fail miserably in keeping up with the average rate of inflation. This means that you are losing money when you buy a structured settlement annuity because the earning value of your money is actually decreasing. That’s not a good thing!

Structured settlement brokers will try to mollify your concerns about inflation by offering a cost of living adjustment (known as a “COLA”) to the annual annuity payments that increase the monthly payments by three to four percent. That’s fine, but you pay for the COLA big time by reducing the amount of the monthly payments you will receive. Even with the COLA added to your annuity, you still are not keeping up with the historic rate of inflation of 4.43% and thus, the value of your money is diminishing.

Structured annuity brokers for the defense will push annuities on you since they stand to make a four percent commission on the amount of the annuity. For example, with a $1 million annuity, the broker gets $40,000. Not a bad day’s work!

There are situations where structured annuities make sense, such as a paralyzed four-year-old infant with a substandard life expectancy, but that is the unusual situation. For my clients, I rarely recommend structured settlement annuities…or at least I’ll wait until the interest rates go up.