Personal Finance 

What Are Structured Settlements?

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I’m sure you’ve seen the advertisements on TV. People opening windows and shouting “It’s my money and I need it now!” They’re advertisements for JG Wentworth, a company that specializes in paying out lump sums for people who are collecting regular checks from some sort of settlement. On a recent visit home to New York, I saw a lot of these advertisements on TV (my parents don’t have DVR). Then, recently, my friend invited me to a business networking event where I met someone who worked at a financial services company. His area of expertise was buying things like structured settlements and lottery winnings, a future stream of income, and then selling them to institutional investors. He was looking to meet with institutional investors, of which there were several at the event, to sell these instruments to.

It got me thinking… what’s the deal with these structured settlements?

What is a Structured Settlement

Let’s say you sue a company and either win or settle for some amount. You can, in reaching an agreement with that company, arrive that a solution in which you get a structured settlement. Instead of receiving a lump sum, you basically get an annuity. You receive a certain amount of money each month for a specified period of time. It’s not really much different than winning the lottery and picking the annuity option. Once the terms have been established, the contract has been signed, neither party can change the terms. There are a variety of reasons why you might choose the annuity over the lump sum, such as tax reasons, but in the end that decision would be up to you.

Where do these businesses come in? Let’s say you get that annuity and it’s working out great for you. Two years in, you suddenly need access to funds and the structured settlement represents the best opportunity for you to raise those funds.

Selling Your Structured Settlement

When you sell your structured settlement, you can sell all or part of the settlement to a company for a lump sum (this all depends on what your state law allows). The idea behind selling it is that you are able to consolidate a future stream of payments into cash today.

What should you watch out for in selling your structured settlement?

  • You’re not getting full value. This is pretty obvious since these companies have to make money somewhere. You will not get the full value of your annuity, or whatever portion of the annuity you sell, when you sell it because the buyer needs to show a return somewhere. In more common investment terms, you currently own a bond that pays out a coupon every month. That coupon won’t change so the only way to make money is to pay you less than it’s value. You get cash, they get a future stream of income.
  • You may owe taxes. You may owe taxes if you sell your structured settlement, whereas you probably aren’t paying taxes on the structured settlement payouts. So if you do get a quote for your structured settlement, be sure to take into account the bite that taxes will take.
  • Why are you selling it? If there’s an emergency and there’s no other way to get funds, you might not have a choice. If it’s not an emergency, try to find another way because you’re going to give up a lot of value by selling the structured settlement.

Buying Structured Settlements

I did a little light reading on the subject and it appears to be complicated – which is my way of saying it’s really outside the scope of Bargaineering. Just take a brief gander at the Wikipedia article on Structured settlement factoring transaction and it becomes clear that this requires expertise to do (if only to jump through the legal hoops).

So in summary, it’s definitely your money, but if you want it now then you’ll have to pay someone for the pleasure. 🙂

{ 6 comments, please add your thoughts now! }

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6 Responses to “What Are Structured Settlements?”

  1. Really interesting. I’m a big fan of John Grisham novels, and there are many mentions of structured settlements. I have never fully understood what these are, so these are some great insights.

    I really wish the J.G. Wentworth commercials would be banned from the airwaves!!

  2. Wilma says:

    I too have read up on the structured settlement thing and it made my head spin. The taxes and laws surrounding them are the issue. I live in PA which is really good at getting their fingers into any inheritance, lottery winnings or wind fall. I’ve had friends that their inheritance or lottery winnings turned into a nightmare because of the laws and tax system here in PA. You’d really have to have a good lawyer in your corner who knows how to explain all the ins and outs of a structured settlement.

  3. Mark says:

    At one time I was a Field Insurance Adjuster for a very large company that insured mainly Businesses, Public Bodies and had very few Personal Policies.

    We insured a lot of School Districts and kids will get injured and at times the District will be liable.

    I settled a lot of claims for minor children with Structured Settlements. Pay the medical bills now, give the family some money now and then the Child gets payments in the future after they are Adults. I did a lot of them and indirectly put quite a few kids through College and a healthy down payment on a House or Car and when ready to have family, there was money there as well. Also payments for future medical bills. Each settlement was unique and tailored to the Individual and type of injury.

    Most were settled without anyone filing a lawsuit. Though the children were minors, we did have to have a Judge approve the settlement.

    The vast majority of the time the Kids received much more money this way then if there parents had taken the cash and tried to invest it themselves. I had access to guaranteed annuities that paid more. I was starting with a pot of money ranging from $50k to $1,000,000 in most of these.

    I also did the same with Adults who were injured, but they mainly wanted the cash now. I had one case where I put together a sizable Structured Settlement that was rejected by their Attorney. The cash settlement he countered with was $150,000 less that what I was going to pay for the Structured Settlement Package.

  4. Elaine says:

    My brother sold his to JC Wentworth–got 37,000—his annuity was for a guarantee payment for 20 years,totaling 5.7 mil if he lived to the age of 72. Go figure. If you are deperate, they will take advantage of you. Oh–430,000 investment. Yeah.

  5. Elaine says:

    After he passed away, they would not talk to us. As for his children…

  6. Jay Reynolds says:

    I sold my structured settlement after a car accident in order to help pay for some bills that were piling up. While it is not advisable to everyone to do it, selling you settlement can be an effective tool to take care of bills that require immediate payment. What was everyone else’s experience?

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