Life Annuities

With life annuities there is no risk of annuitants outliving their resources since the payments continue as long as they are needed. Second, the mortality assumptions for the group of all structured settlement annuitants are more favorable than for regular retirement annuities. Third, claimants with potentially life-shortening medical issues will be medically underwritten by the life companies and provided with higher periodic payments for a given premium investment. Medical underwriting resulting in the use of a reduced life expectancy or "rated age" to calculate future periodic payments can significantly increase the benefits to a claimant from a given settlement amount.

For claimants with either a normal or a medically adjusted life expectancy, a diversified portfolio of stocks and bonds may well be exhausted before the claimant's life expectancy if distributions from the portfolio match the payments from an annuity with a comparable cost. Few claimants can afford the risk from uncertain taxable returns combined with longer than anticipated life expectancies. A structured settlement annuity eliminates this risk by providing claimants with guaranteed lifetime income for as long as they might live.

In forecasting portfolio investment returns, we assume that claimants will invest rationally and in efficiently diversified portfolios with low expenses and that they will earn market returns. Studies by Dalbar, Inc., a widely respected financial research firm, have shown that, in the past 30 years, the average investor earned just 3.66% annually during a period when the S&P 500 increased at an annual rate of 10.35%. Certainly, most claimants are unlikely to outperform average returns and will, in almost all cases, not do nearly that well after fees and costs are subtracted. Indeed, experience has shown that most lump sum awards are dissipated long before the claimant's financial needs end.