Planning Considerations for Personal Injury Settlement Recipients

Cordell, David M.; Tombs, Joseph W.
January 2005
Journal of Financial Planning;Jan2005, Vol. 18 Issue 1, p26
Academic Journal
This article attempts to isolate a few of the factors and suggest a theoretical and practical framework to evaluate the decision of how much of the personal injury claim settlement should be received in the form of structured future payments. Clearly, the existence of a structured settlement alternative has a unique effect on the risk-return analysis performed by the planner. Structured settlements may offer a lower-risk, higher after-tax return alternative to the efficient portfolios of risky assets available to others. Therefore, the assumptions underpinning traditional investment analysis using modern portfolio theory (MPT) need to be adjusted. Using the assumption of risk aversion, Harry Markowitz showed that if all possible portfolios were plotted on a return-risk graph, a set of efficient portfolios could be identified that would meet two criteria: for a portfolio's level of return, no other portfolio has less risk, and for its level of risk, no other portfolio has more return. Individual investors prefer the portfolio that is on the efficient frontier and that meets the investor's risk criteria; that is, a more risk-averse investor would select a portfolio farther to the left on the efficient frontier than would a more risk-tolerant investor.


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