A structured settlement is a form of compensation awarded to a plaintiff when they win a court action against an entity they have accused of being negligent or of causing them injury. Instead of compensation being paid out in one lump sum, the defendant pays portions of the total amount over a period of time.
In some cases, a plaintiff will be allowed to choose between a lump sum payment and a structured settlement, while in other circumstances, they may only be allowed to accept a structured settlement. Money is paid out according to an agreed-upon timetable, usually either monthly or yearly.
Benefits of a structured settlement *
- Most people do not have the ability to manage a large amount of money such as that which one receives as a lump sum. The temptation to squander it is far too great for people to handle. Additionally, large sums of money often tend to attract relatives looking to share the wealth, as well as shady investment deals. Conversely, a structured settlements small payments over time can be a much safer way to receive compensation and ensure that it is spent or invested wisely
- Cost of living adjustments can be built into a structured settlement.
- Payments can be customized to the plaintiffs needs.
- A structured settlement cannot be taken during a divorce.
- Structured settlements may also be set up so as to guarantee income for life.
- Lump sum settlements are immediately subject to income tax, meaning that a large portion of your money will be handed over to the government before you can see it in your bank account. In contrast, tax obligations are significantly reduced with a structured settlement, due to the laws that provide for tax exemptions in such situations. It may even be possible to negotiate a deal that removes all tax obligations, though this depends heavily on the skill of the plaintiffs lawyer.
Disadvantages of structured settlements *
- Monetary needs may change over the years; the structured settlement set up years ago may not always fit your situation in the future.
- A plaintiff may have to pay a sizeable commission in order to set up a structured settlement.
- Purchases requiring a great deal of money upfront, such as a new car or house, usually cannot be afforded with just the money received from periodic structured settlement payouts.
A structured settlement loan is a type of loan that uses a structured settlement as collateral for the loan amount. This type of arrangement allows an individual with a structured settlement to gain access to a larger lump sum of money when needed, and then pay back that loan with the payments received from the structured settlement in the future.
The amount of the loan is often based on a percentage of the structured settlement, usually between 70% and 90%. Because there is a guaranteed source of money that can be used to pay off the loan, the lender takes much less risk in approving the loan. As such, lenders are often likely to offer a competitive rate of interest as part of the terms and conditions of the loan.
Structured settlement loans are beneficial for the borrowers as well; by using their structured settlement as collateral, they do not have to risk their assets, worry about how to repay the loan, or bother with employment and credit history or background checks.
Another way of turning a structured settlement into a lump sum is to sell it to company that buys settlements. This is often seen as a favorable option for those who have had unexpected expenses, need money for a large purchase, or for those for whom the previously agreed-upon arrangement regarding the structured settlement is no longer working.
The process of selling a structured settlement *
A plaintiff is awarded a structured settlement, meaning that they have the right to receive periodic payments of an agreed-upon amount of money until the entire sum has been paid. Then, for whatever reason, the plaintiff finds that they need a large amount of money quickly. They could use their structured settlement as collateral for a loan, as explained in the previous section, or they could choose to sell.
Making the decision to sell is the first step in a lengthy, court-controlled process. Late night advertisements often make it sound like selling a structured settlement is as easy as calling a phone number, but in reality, it is much more complex:
- In order for the final sale to be approved by a judge, the plaintiff must first demonstrate that they have a legitimate reason for wanting to sell, such as medical expenses, paying for school, or buying a house. If they cannot demonstrate this need, then it is not even worth contacting an agency, because a judge will not approve the sale. The majority of state laws require that transferring the rights to the settlement be in the best interest of the plaintiff.
- If the plaintiff believes they have a good reason for wanting to sell, they contact a company that buys structured settlements, such as JG Wentworth. It is best to contact several companies to see which one will give the lowest discount rate, which can range between 6%, which is extremely favorable to the plaintiff, and 30%, which is predatory. Once a deal is made, the company will file a petition for the transfer of the settlement. A judge will then approve or reject the transfer. It can take 60 to 90 days for the entire procedure to be completed.
- It should be noted that 2/3 of the states have laws restricting the sale of structured settlements. There are federal regulations regarding the sale of tax-free structured settlements to third parties. Additionally, some insurance companies will not transfer annuities to third parties.
Tips for selling a structured settlement *
- Individuals should realize that they do not have to sell the entire sum of their structured settlement.
- Every step should be taken to ensure that the company with which one does business is highly reputable, has never declared bankruptcy, and has a solid rating with the BBB.
- Scout out the lowest discount rate.
- Individuals selling their structured settlement should do their homework and make sure that they fully understand each step of the process.
Advantages of selling a structured settlement *
- Necessary funds are made available in a relatively short period of time. For people who must pay large sums of money out-of-pocket or find themselves facing medical expenses or house foreclosure, this can be a lifesaver.
- Allows an individual to invest their savings exactly as they want them.
Disadvantages of selling a structured settlement *
- Individuals who totally rely on their structured settlements periodic payments in order to live may find themselves in a bind when they do not have that money coming into their house. This is especially true if something happens to the lump sum received from the sale of the structured settlement, such as an investment going wrong.
- Due to the numerous tax advantages afforded to structured settlements, there can be significant tax consequences associated with selling all or part of one.
- Most people find it easier to manage smaller amounts of money; a lump sum in the hands of someone who is not particularly financially savvy can be disastrous.
In this time of economic instability, it is not hard to see why the charms of a high-yield, low-risk investment would ensnare so many investors. However, like any other type of investment, secondary market annuities have both their advantages and disadvantages and while they may be right for some, they certainly are not right for all.
The process of buying a structured settlement *
The company that buys the structured settlement from the plaintiff usually does not keep it; instead, they resell the rights to an insurance agent or stockbroker. From there, the broker or insurance agent sells it to the public. In recent years, structured settlements have become popular investments as they offer a guaranteed rate of return for up to 20 years, often pay between 5.75% and 7.75%, and are often considered fairly low-risk because the annuity is typically issued by industry giants, such as Metlike and New York Life, who are unlikely to go bust. It is exceedingly rare that a high-yield investment is also low-risk, which explains much of popularity of secondary market annuities. However, like all other investment types, structured settlements have their advantages, but they have their downsides as well.
Advantages of buying a structured settlement *
- Buying a structured settlement is usually not as risky an investment as other high-yield types.
- The investment offers high yields.
- The purchaser receives a fixed income.
- Most secondary market annuities are with solid companies with high safety ratings.
Disadvantages of buying a structured settlement *
- There is a lack of liquidity. Secondary market annuities are typically long-term investments that individuals expect to hold onto for years. However, what happens when an unexpected expense or tragedy befalls these individuals? There is no tertiary market for this type of investment. The firm that sold it originally will not buy it back. And, depending on the fine print of the court order, the individual holding the investment may not be allowed to ever sell it to anyone else. In cases like this, the investor is stuckthere is no way to cash in or liquidate secondary market annuities.
- No two structured settlements are alike, as they were designed around the circumstances of the plaintiff. This means that payouts may be irregular.
- The security of the investment is tied to the insurance company that makes the payments.
- They are not insured by the FDIC
- There are very few credible organizations offering large inventories and with this type of investment, a specialist should always be contacted.
- Industry experts typically advise that only those who truly understand what they are doing invest in secondary market annuities. The prevailing opinion is that this type of investment is not for the everyday individual, as the process is extremely complex, can be risky, and involves the legal system.
Sources
Cashfuturepayments.com. Why You May Want to Sell Structured Settlements. Available from: http://cashfuturepayments.com/blog/why-you-may-want-to-sell-structured-settlements/
Craig, Brenda (2011) Before You Sell Your Structured Settlement Read This. Available from: http://www.lawyersandsettlements.com/articles/financial/interview-consumer-fraud-financial-15728.html#.VNQfHp3F9io.
Guillot, Craig. Want settlement cash now? Not so fast! Available from: http://www.bankrate.com/finance/debt/want-settlement-cash-now-not-so-fast-1.aspx.
Haithcock, Stan (2013) Secondary market annuities boast higher yields. Available from: http://www.marketwatch.com/story/secondary-annuity-market-boasts-higher-yields-2013-10-29?page=2.
Larson, Aaron (2005) Selling Your Structured Settlement. Available from: http://www.expertlaw.com/library/finance/selling_settlement.html.
Larson, Aaron (2005) The Structured Settlement. Available from: http://www.expertlaw.com/library/personal_injury/structured_settlement.html.
Legacysettlements.com. The Advantages. Available from: http://www.legacysettlements.com/advantages.htm.
Matsen, Curt, CPA (2012) Structured Settlements: A comprehensive report on structured settlement buying, selling and investing. Published by Green Initiative.
Moneymatters101.com. Structured Settlements (Advantages and Disadvantages) Available from: http://www.moneymatters101.com/strset/ad.asp.
Schmoll, John (2012) Is Selling a Structured Settlement a Good Idea? Available from: http://www.frugalrules.com/selling-structured-settlement-good-idea/.
Wisegeek.com. What Is a Structured Settlement Loan? Available from: http://www.wisegeek.com/what-is-a-structured-settlement-loan.htm.
Wood, Robert W. (2010) Whats A Structured Settlement? Available from: http://www.forbes.com/sites/robertwood/2010/10/26/whats-a-structured-settlement/.
Zweig, Jason (2010) Another Cant-Miss Deal That Can Miss Spectacularly. Available from: http://www.wsj.com/articles/SB10001424052748704249004575385140963405252.
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