10 Questions About Buying Structured Settlements
#1 – What is a structured settlement?
Basically, a structured settlement is a payout alternative. Under a structured settlement, you can receive a lump sum payment from a legal settlement due to a lawsuit. We will go into greater details about buying structured settlements later on. But first, let’s review the basics.
Understanding A Structured Settlement
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.
Plaintiffs 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 payment method. Annuities are used to make the periodic payments. Since no two lawsuits are the same, no two structured settlements are the same. As a result, some payments can be set up to payout for the life of the plaintiff.
Defendants in the lawsuit have to make arrangements for the payout. They satisfy their end of the settlement (the payout) by purchasing an annuity from an approved insurance company. From this annuity, the insurance company will guarantee the future payments to the plaintiff.
#2 – 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. Receiving a periodic payment can be a great relief for many.
Another advantage is that the payments are usually never “prematurely exhausted”. This benefit guarantees even more financial security for the injured party, the plaintiff.
#3 – Tax advantages of receiving periodic payments?
Are there any tax advantages to receiving periodic payments from a structured settlement? Yes, quite often. In most cases, the payments from a structured settlement are income tax-free. But everyone’s tax situation is different, therefore, it would be best to check with your accountant.
#4 – Who sells and buys structured settlements?
Individuals sell them. And individuals can also buy them. When an individual is buying structured settlements they do it through a broker/dealer, not directly. Keep in mind though that individuals are not the only ones who would be buying structured settlements. Retirement plans such as 401k’s, 403b’s or 457’s, corporations, foundations and trusts can also be buying structured settlements for investment purposes.
#5 – Is selling a settlement the right financial move?
Whether or not selling a structured settlement would be a good financial move for you all depends upon your circumstances. 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.
Before selling your settlement, there’s another issue you need to address if you determine that you do need an immediate stream of cash. This 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, ask yourself if you want to stop the flow of cash you are receiving. If you are not willing to sell your rights to the future cash flow you are currently receiving, stop. When you sell your structured settlement you give up your cash flow. When you hear the phrase “structured settlement for cash” it literally means you receive cash right away instead of waiting every month for the scheduled periodic installment payments.
#6 – Need cash immediately, where can I sell my settlement?
If you have a structured settlement and need the cash immediately, is it easy to sell your structured settlement? Where can you sell it?
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 a big part of some insurance companies business models. 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.
#7 – How does selling annuity payments for cash work?
If you ever wanted to sell your structured settlement, the approval of a judge is required. The reason for prior court approval is in your best interest. The courts understand that you would be giving up your future rights to the cash flow of your periodic payments. 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. You would most likely be denied a request for immediate cash if you told the courts the reason for needing immediate cash was to pay for a vacation.
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.
#8 – What happens to my settlement once I sell it?
If I do sell my annuity payments, what does the insurance company or annuity firm that buys that settlement do with it? And should I be concerned about that?
After an insurance company buys or exchanges your structured settlement, you give up your right to any future cash flow. In exchange for that future cash flow, you receive a lump sum. The insurance company then takes your settlement and resells it to investors.
#9 – Can I sell my entire settlement?
Whether or not you can sell your entire settlement 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 you. Their purpose is to bring you as close as possible to the same standard of living you had before the incident that prompted the structured settlement.
#10 – Is it a good financial move to be buying structured settlements?
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 marketplace for buying structured settlements. Annuity payments would be backed by highly rated insurance companies but liquidating structured settlements can be risky.
Structured settlements have a use for individuals and investors. They help individuals who have been severely injured and cannot rebound financially due to their immense and massive injuries. For example, someone paralyzed due to a car accident. Or, crippled from a work-related injury. 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. Buying structured settlements is not the right investment for every investor. Be sure that you learn all you can about structured settlements before you start investing in them.