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What Are Structured Settlements?

Posted By Jim On 09/06/2011 @ 7:11 am In Personal Finance | 6 Comments

I’m sure you’ve seen the advertisements [3] 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 [4] 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.


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[3] advertisements: http://www.youtube.com/watch?v=HX0fIi3H-es

[4] Structured settlement factoring transaction: http://en.wikipedia.org/wiki/Structured_settlement_factoring_transaction

Thank you for reading!