Investing in structured settlements

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Jul 22, 2009 9:13 pm

Question for you guys, Whats your opinion on investing in structured settlements, you make 7% return on your money tax free guaranteed by major insurance companies, the way it works is, say someone sues a company, the insurance company decides to settle, some settlements get annuitized, insurance will pay plaintiff example $300,000 over x amount of years, investor buys settlement from plaintiff for $200,000 that he gets now, it usualy comes out for the investor  about a 10% return a year 3% goes to broker that found settlement investor is left with 7%, it is tax free thats the law for lawsut settlements it is a better return than a muni, However there is no market for it so there is no liquidity is it legit?

Jul 23, 2009 5:50 am

Something is wrong.  Why would an insurance company pay an investor anything other than the market rate...ie what they pay on fixed annuities?  Why would it be tax free instead of tax deferred?  3% goes to the broker?  Maybe upfron in year only, but then that starts to look a lot like a fixed annuity.  I can almost picture the sham wow guy selling this on late night TV.

Jul 23, 2009 12:09 pm

You obviously didnt understand, The insurance pays plaintiff setllement in payments, then investor pays cash now for the settlement at a discount, broker gets 3% of the sale.

Jul 23, 2009 9:03 pm

I'm trying to think outloud on this one.  I'm going to use the name "JG Wentworth" generically for any company that purchases annuity payments.

 
Why does it matter if it is a structured settlement?  What's the difference if somebody is getting $30,000/year because the won a lawsuit (or settled) or because they won a lottery or because they purchased a SPIA?  I'm not talking from the viewpoint of their taxation, but rather from the viewpoint of someone who wants to buy out their settlement.
 
Anyway, John is getting $30,000/year for the next 10 years from ABC insurance company.   The "kind" folks at JG Wentworth wine him and dine him and tell him how his life would be so much better if he would sell the payments to them for a lump sum of $200,000.
 
He agrees to the buy out.  JG Wentworth gives him $200,000.  JG Wentworth will collect $30,000/year for the next 10 years.
 
So, what we are really talking about from the investor's point of view is that JG Wentworth doesn't have the available cash for the settlement buyouts that they want to do.   They are also unable to borrow from a bank at decent rates.  We know that because they wouldn't be willing to pay 10% on this money if they didn't need to do so.  Thus, they must find investors to front the money for the settlements.
 
The payments to JG Wentworth are guaranteed by the insurance company.  However, that doesn't mean that the payments from JG Wentworth to the investor are guaranteed. 
 
Regardless of whether the payments to the original person are taxable, non-taxable, or a combination, I don't know if that is relevant to the investor.   To the investor, it is an investment and the gains should be taxed.
 
To summarize:
1)Payments are coming from JG Wentworth and not the insurance company
2)JG Wentworth has financial difficulties or else they wouldn't need the investors.
3)The investment is taxable.
4) The companies that are in this business tend to be predatory in nature.
 
Anyway, I don't know if I'm right, but that is my initial thought process.
Jul 28, 2009 9:10 pm

Nice summary, Just to correct you  "JG Wentworth" does not buy the settlement they are brokers to the investor like a real estate agent, judge has to approve transfer of settlement to the investor, So you do have ABC insurance company having to make payments to investor.

Jul 29, 2009 6:52 am

Thanks for the clarification.

Jul 31, 2009 10:59 am

client of mine asked me about it and I asked an insurance broker I am friendly with...the only thing that I got out of it was that yes it is legal and it is potentially a great deal, you must be mindful of which insurance company issues it and the only reason insurance guys dont like it is because it has the appearance of dirty, but eally isn't

Aug 30, 2011 2:39 am

Since debt settlement hits your credit score terribly, you can easily look for investing in structured settlements.  The insurance pays plaintiff setllement in payments, then investor pays funds now for the settlement at a discount, broker gets 3% of the sale.

Nov 10, 2013 5:26 am

A Structured Settlement Annuity ("Annuity") is a contract issued by an insurance company as part of a structured settlement to fund the payment of damages for personal injury over a period of time. It guarantees the holder or annuitant a payment stream over a fixed term at a fixed rate of interest. Unless otherwise specifically stated the Annuity is paid regardless of whether the measuring life is alive or deceased, meaning these payments are NOT life contingent. Structured Settlement Annuities are sold by structured settlement annuitants to a broker at a discount in exchange for a lump sum payment.
Also, although the credit rating of insurance company is strong, there's certainly credit risk in relying on cash payments over the next 20 years from a single insurance company.

Nov 13, 2013 6:16 am

After acquiring the rights to a future income stream (such as a retiree’s pension payments), these pension purchasing or structured settlement companies, sometimes called “factoring companies,” may turn around and sell these income streams to retail investors, often through a financial advisor, broker or insurance agent. These products go by various names—pension loans, pension income programs, mirrored pensions, factored structured settlements or secondary-market annuities. They may be pitched to investors with words like “guaranteed” and “safe”—and may tout robust returns that outpace more traditionally conservative investments such as CDs or money market accounts. The advertised returns may sound enticing, but investors should be aware that these investments can be risky and complex.
Its quite an informative thread about the same.

Nov 14, 2013 7:34 pm

I have purchased a structured settlement as an investor. I am now receiving monthly payments from Met Life for the next 20 years, IRR 8% to me. Why do people ask others on these forums rather than do their own research on the Internet? This thread is the blind leading the blind.