buying structured settlements

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Learn The Basics Of Buying Structured Settlements

Frequently Asked Questions On Selling and Buying Structured Settlements

What is a structured settlement?

A structured settlement is basically an alternative to lump sum payments from a legal settlement as a result of a lawsuit.

When a plaintiff wins a product liability, medical malpractice, personal injury or wrongful death lawsuit they are awarded a settlement. Automobile accidents and worker’s compensation cases can sometimes be paid out under structured settlement arrangements also.

The plaintiff can receive the settlement in a lump sum or a series of scheduled periodic payments over a period of time. A structured settlement is the periodic payments. Since no two lawsuits are the same, no two structured settlements are the same; therefore, some payments can be set up to payout for the life of the plaintiff. When periodic payments are chosen as the method of payment, annuities are used to provide those payments.

The defendant in the lawsuit has to make arrangements for the payout. The way they satisfy their end of the settlement (the payout) is to purchase an annuity from an approved insurance company. From this annuity the insurance company will guarantee the future payments to the plaintiff.

What are the advantages of a structured settlement?

The most important advantage of a structured settlement is that the periodic payments provide financial security for the plaintiff, the recipient. In addition, the payments are usually never “prematurely exhausted”, which guarantees even more financial security for the injured party (the plaintiff).

Are there any tax advantages to receiving periodic payments from a structured settlement?

In most cases the payments from a structured settlement are income tax-free.

Who sells and buys structured settlements?

Individuals sell them. And individuals can also buy them, through a broker/dealer but not directly. Individuals are not the only ones to buy structured settlements; retirement plans, corporations, foundations and trusts can also buy structured settlements for investment purposes.

Is selling a structured settlement a good financial move?

Every situation is different. Selling structured settlement payments is quite common although not always the best financial move.

If you are a settlement holder, before you sell structured settlement first determine if your need for cash is immediate. If you can continue to meet your expenses with the periodic structured settlement payment you currently receive and do not need an immediate stream of cash, it may be in your best interest to hold onto your settlement.

If you determine that you do need an immediate stream of cash, before selling your settlement, another issue you need to address is to decide whether or not you can really manage a lump sum of money. It sounds elementary, but managing large sums of money can get complicated. If you receive a lump sum of money from the sale of your structured settlement it could be the largest sum of money that you have ever had access to. You will need to make that money last and most people are not trained to properly manage a large sum of money like that. If you were awarded a lump sum of $500,000 from a worker’s compensation lawsuit for example, would you have the financial discipline to manage it wisely so that it would last? Or would the temptation to spend that money be too great? That’s a difficult question.

Neglect, misuse or mismanagement of a lump sum and just basic lack of investment knowledge is often the reason periodic payments are better than lump sum payouts. That is also one of the reasons most people do not sell their settlements unless they are truly desperate for cash. So be very honest when you ask yourself; if I sell my structured settlement payment will I be able to manage the lump sum of money I will receive?

After you have determined your need for cash and your ability to manage a large amount of cash be sure you are willing to sell your rights to the future cash flow you are currently receiving, because that is what you will be doing when you start selling structured settlements.  When you hear the phrase structured settlement for cash it literally means you get cash for structured settlements right away instead of waiting every month for the scheduled periodic installment payments.

If I have a structured settlement and I need cash now where can I sell my settlement?

There are many insurance companies and structured settlement annuity firms available who are more than happy to buy your structured settlement. Buying structured settlements is their business. These companies buy structured settlements at a discount then turn around and resell them for a profit.

But stop, not so fast. Selling your structured settlement is a slow, controlled process that is regulated and managed by the courts. Finding a company to buy your settlement is the easiest part.

When someone is selling annuity payments for cash how does it work?

If you ever wanted to sell your structured settlement, the approval of a judge is required. The reason for this is in your best interest because you would be giving up your future rights to the cash flow of your periodic payments and the courts do not want you to run out of money. If you sell your settlement for a lump sum of cash, spend it all and cannot care for yourself without that settlement money you will become a ward of the state. To avoid that situation selling your annuity payments for cash is closely reviewed and approved by the courts.

Before selling your settlement you will also need to prove to the courts that you have a true, immediate need for the cash that you are requesting. Buying airline tickets for a vacation trip, a new car or going on a shopping spree is not considered by the courts to be true need, so will most likely be denied your request.

A judge will also deny requests for cashing out a structured settlement due to any fears you may have about negative market conditions, inflation or any other economic conditions that could affect the value of your payment. A legitimate need for cashing out your structured settlement would be to pay for your medical costs, rehabilitation expenses, repay any debts or any additional living expenses.

If I do sell my annuity payments what does the insurance company or annuity firm that buys my settlement do with it?

After the company buys (or exchanges) your right to any future cash flow for a lump sum, it resells your settlement to investors.

Would I be able to sell my entire settlement?

That would depend upon the court. In order to continue to meet your current as well as future financial needs, most courts will only approve the sale of a portion of your structured settlement. Again, that is in your best interest. Keep in mind that the courts are not out to get you. The courts are there to protect your ability to come as close as possible to maintaining the same standard of living you had before the incident that prompted the structured settlement in the first place.

Is buying structured settlements, in other words, investing in structured settlement annuities, a good financial move?

That all depends. Your investment in a structured settlement would be a long-term investment because the maturity is usually a minimum of several years. In addition, the returns are higher than other investments, however, that is not due to the investment being risky in and of itself. Your risk comes in the form of liquidity. There is not a high demand in the market place for buying structured settlements. So even though your actual annuity payments would be backed by highly rated insurance companies, your ability to liquidate a structured settlement is not so great.

Structured settlements have a use, for individuals and investors. They help individuals who have been severely injured and cannot rebound financially due to the immense and massive damages caused by the injury. And for the investor, they can be a good investment opportunity for some but not for others. As with any investment, before investing, just be sure you understand what you are investing in.