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: Structured Settlements 4Real

Structured Settlements ARE Competitive With Bonds

By John Darer

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Structured settlement annuity yields remain competitive to other alternatives, even in cases where there is no lifetime payout. Even if you don't need lifetime income, a fixed income investment may be part of, or may have been recommended to be part of, your portfolio.

So let's illustrate a structured settlement in which the payment flows are modeled after a bond held to maturity. Generally the issuer of a bond (usually a government entity or corporation) pays periodic interest to the bondholder until maturity and then, the bondholder receives back the amount invested. Listed below is a comparison of yields on structured annuity simulations of several types of 10, 15 and 20 year bonds and the corresponding yield on the bond that is being simulated. Once again, for this illustration, the bonds are assumed to be held to maturity.

10-year Simulation

10 Year U.S. Treasury	3.50% taxable
10 Year AAA tax-exempt municipal	4.01% tax-exempt
Structured annuity IRR from A+XV AM Best rated company simulating same cash flow	5.03% tax-free*

15- year Simulation

15 Year AAA tax-exempt municipal	4.66% tax-exempt
Structured annuity IRR from A+XV AM Best rated company simulating same cash flow	5.50% tax-free*

20 year Simulation

20 year US Treasury	4.49% taxable
20 year AAA tax-exempt municipal	4.78% tax-exempt
Structured annuity IRR from A+XV AM Best rated company simulating same cash flow	5.69% tax-free*

Lifetime structured annuity payments, which may incorporate rated age pricing, may have even higher yields than those shown above. Unlike bond payments, structured annuity payments can be customized. For example, while bond payments are traditionally paid on a semi-annual basis, the structured annuity payments could be paid monthly, quarterly, semi-annually, annually or even bi-weekly! They can also be immediate or deferred and have increasing payments

Sources:
For T-Bond rates: Federal Reserve Statistical Release H.15. For Municipal Bond rates: Bloomberg.com. Rates as of 05/05/2008 used for illustrative purposes only. Structured annuity rates, based on "book" rates available during the week of 05/05/2008, using Metropolitan Life Insurance Company, New York, NY rated A+XV AM Best, Aa2 Moodys AA Standard & Poors for illustrative purposes. Actual rates subject to change and should be shopped and custom quoted to reflect your specific needs.

* all references to "tax-free" in this post refer to the income tax status of the payments

IRR= Internal Rate of Return

What is "after tax" yield on taxable investments like US Treauries and Corporate Bonds? Click here. Use the after tax yield to compare to the structured annuity IRR.

Full post as published by Structured Settlements 4Real on May 05, 2008 (boomark / email).