Purchasing structured settlement by factoring companies from the individuals receiving the payments. They then turn around and sell these payment streams to investors
Purchasing structured settlement often done by several companies that specialize in trading these payment streams. Individual receiving the payments trade them for a lump sum, and the company sell the payments stream to investors. The transaction happens on a secondary market similar to annuity trading. These three parties that take part in the process the structured settlement payments owner, buying company and an investor.
Structured settlement purchasing companies, known as factoring companies, serve those selling their periodic payments. Therefore, the companies offer settlement owner lump sum of cash for their right to future payments. It may be a portion of the future payments exchanged at a discount rate. The transactions between the settlement payment holder and a third party (investor, factoring company, or annuity broker) are referred to as the secondary market for annuities.
What considered a structured settlement?
Structured settlements arise from a legal settlement where an individual receives compensation for damaging paid as an annuity for years. It might result from a settlement in an accident case where the recipient sues for personal injury. Through a lawsuit judgment or out of court settlement, the insurance company of the defendant agrees to make the payment to claimants.
Structured settlements can also occur through a lottery winning where the winner takes the winning as annuity—each structured settlement designed differently. For an instant, payment set for years or even a lifetime. In most cases, it bases them on the unique needs of the plaintiff or beneficiary.
For example, the individual after an accident it may be determined that they might replace an expensive piece of equipment needed in their care at specific intervals.
Sometime the annuity holder may cash out the structured settlement. When the owner changes their mind and looks convert the balance of their annuity to a lump sum, this is where a factoring company comes in. After the original holder cash out, the right to future payments creates an investment opportunity. Purchasing structured settlement diversifies your investment portfolio as the annuity payments enjoy the same benefits as the original plaintiff.
Purchase structured settlements
An investor can buy structured settlement at a discount to the full amount of payout. Besides, the factoring company buys the right at a discounted rate, and sells them at a markup to an investor. The recipient of the annuity payments receives a discounted lump-sum now. It bases the return in investment on receiving the full amount of annuitized settlement payments. Besides, it is in exchange for their upfront investment paid to the recipient as a lump sum.
So, purchasing structured settlement is often done by several companies that specialize in buying the payment streams and reselling the same. Therefore, structured settlement buying companies connect the recipient of a structured settlement and an investor looking for low-risk assets.
Structured settlements a good idea?
While looking for assets to diversify your portfolio, you might have come across an asset broker recommending you invest in a structured settlement. Although most people consider structured settlement as controversial, they are an interesting form of asset. We associate them with aggressive ads urging people to cash them in.
Why are they traded?
Structured settlement guarantees the plaintiff a series of payment over a defined term. Usually, the arrangement is managed by the insurance company of the defendant. But, to mitigate the risk linked to traditional annuities, the government requires the insurance company to enter reinsurance deals with reputable insurers. For example, Warren Buffett’s Berkshire Hathaway is a prolific reinsurer of structured settlements. Therefore, reinsurer takes the responsibility of fulfilling all or part of the structured settlement contract for a share of the premium.
As described above, an investment opportunity arises when the plaintiff decides they need access to a lump sum instead for the annuities payments. Therefore, an investor (or investors) stumps up the cash or a lump sum. Insurance company fulfills the scheduled payments to the investors instead of the recipient plaintiff. But it is less than the broker fees.
Structured settlement benefits
So what are the benefits of investing in a structured settlement? One benefit of purchasing structured settlement is the discount. Therefore, depending on the discount agreed with the factoring company or broker, structured settlement payments offer a high rate of return. In most cases, the rate ranges between 4-7% ranges, although some can come even higher.
Besides, with the current economic climate offering limited high yields opportunities, structured settlement forms a strong asset. Therefore, investors have an important reason to place their money on a structured settlement.
Another plus of purchasing structured settlement is highly rated, and regulated insurance companies hold them. Yet, this makes the structured settlement risk very attractive, and investors feel that their future payouts are in safe hands.
Besides, settlement payments are decided by court-order contractual agreements rather than projections. Investors have peace of mind knowing what the asset will earn and when.
Structured settlement compared to life contingent annuity, they are independent of the plaintiff surviving the term of the agreement. Also, periodic payment enjoys tax-exempt. However, the condition of investment complies with state and federal laws. Besides, some types of structured settlement are taxable but usually at a reduced rate than traditional annuities. Before purchasing structured settlement, get qualified tax advice.
In short, structured settlement offers a high return, a low-risk investment opportunity that many investors know. It is rarely a valid combination. And what is the catch? Why do investors seem ostensibly rewarded so handsomely for virtually guaranteed return?
It is not all shiny for structured settlement investors; the asset suffers some types of risk when compared to other assets such as stocks and shares.
Current structured settlement annuity rates
The current multi-year guaranteed annuity (MYGA) rates determine the guaranteed fixed interest or a specific time period. Multi-year guaranteed annuity rates are subject to fees, called surrender charges which the investor must pay in case of cash out.
The same fees apply to the original holder of the annuity during cash outs. And the best MYGA rate today is:
- 05% for 10-years surrender period,
- 05 per cent for a seven-year surrender period,
- 3 per cent for a five-year surrender period
- 25 per cent for a three-year surrender period.
However, the MYGA rates change daily; therefore, it is important to check back for the most recent rates.
Structured settlement enjoys premium protection. Which means you will always walk away with your purchase payments, no matter what. So, you cannot lose the money you invested with.
Fixed annuities from a structured settlement of all stripes guarantee the safety of your initial investment. Therefore, with fixed indexed annuities, you get both premium protections when the market is down. Also, they come with the possibility of earning high-interest when the market is up. However, you have upside potential within certain limits worth no risk of loss. A structured settlement is risk-free compared to other investment such as stocks that places your principal at risk. Besides, they form exceptional retirement assets for anyone who cannot tolerate risky investment. They need their savings to fund their living expenses for the rest of their lives.
Purchasing structured settlement annuities for retirement
You can buy structured settlement annuities in your life. However, most annuities buyers are those nearing retirements or people in their mid-career planning for retirement. Also, purchasing structured settlement is best for anyone looking to protect their assets through diversification.
It builds structured settlement annuity payments to protect your money and secure future income. They will come in handy when you need the cash most. Therefore, it is important to buy a structured settlement from a reputable provider.
Structured settlement annuity provider includes:
- Insurance companies,
- Independent brokers,
- Banks and other financial groups.
Besides, they are many reputable companies that sell annuities, which is easy to get dumped by brokers or scammer. Therefore, always do your research before investing your money.
Types of annuities sold on the secondary market
There are several types of structured settlement annuities, but each company sells one basic type of annuities.
- Fixed: annuities preset the principal and minimum interest rate.
- Variable: Payments change based on how the investment portfolio performs.
- Indexed: Combine features of fixed and variable annuities.
Where to buy structured settlement annuities?
Annuity issues structured settlement annuities, but it sells not all annuities contract to the public directly via the issuing company own agents.
Besides, the majority of the structured annuities in America are purchased from:
- Annuity distributors, including large brokerage firms known as wirehouses, such as Merrill Lynch and Morgan Stanley
- Independent broker-dealers, like Raymond James
- Enormous banks, such as Bank of America
- Mutual fund companies like Vanguard and T. Rowe Price, which are considered some of the safest annuity companies because they offer lower fees
- Thousands of independent agents, brokers and financial advisors across the country
Purchasing structured settlement for a broker means you will continue to work with them directly as they manage your contract. Even though you will receive information from the insurance company.
So if you own a variable-rate annuity, you will receive statement often from the insurance company regarding the agreement underlying accounts. In case of changes to the account, you might do it through the agent or company who sold you the rights to the annuity.
Structured settlement annuities for your retirement
Purchasing structured settlement annuities often offer very attractive rates for retirement asset. When compared with many conventional annuities that retirees might consider buying from an insurer. Besides, each structured settlement annuity differs in terms of payment structured with others. But buying one or more for your IRA can allow you to set up high-yielding payments streams. The investment aligns well with your own retirement goals.
The Illiquidity Issue and Other Concerns
When investors think about investment, the risk associated with the asset factors in purchasing structured settlement. Besides, it is usually in terms of equity risk. Performance of shares is contingent on supply and demand. The market prices are also unpredictable le and can lead to losses and gains.
Structured settlement investment principal source of risk is liquidity risk. When compared to stocks and shares, assets that can provide regular dividend payments easily sold off. Therefore, investors in structured settlement depend on the details of the payments schedules and have to manage that illiquidity.
Besides, illiquidity creates another risk type- horizon risk. It is where an investor is forced by increasing cash flow needs to sell longer-term holdings. Selling structured settlement assets before the end of term is possible, but only at a heavily discounted price.
Then there is of inflation risk. We do not link structured settlement to inflation, though, over time it erodes the value of the investment over time.
Credit risk arises if the insurance company suffers losses during extreme market conditions. However, this might be covered by reinsurance which protects investors from losing their money.
Besides, large capital in any one asset such as structured settlement exposes your portfolio to concentration risk.
Therefore, as you think of purchasing structured settlement as a risk-free investment, you will still have to put up with some risks.
Purchasing structured settlement Annuitant vs Owner
As you look to buy structured settlement annuity payments, it is important to review an annuity owner and an annuitant. An annuity owner and the annuitant are not always the same person. It is the owner who creates the annuity terms with the insurance company. Also, the owner, designates beneficiaries, can sell the annuity and has automatic rights over the agreements. A structured settlement must have co-owners or heirs, so if the one owner dies, the other right move to the beneficiaries of the agreement.
Therefore, co-owners can be the spouse of next of kin.
While establishing the terms of the annuity contract, the owner (plaintiff/claimant) has an option o naming a third party as the annuitant. Therefore, the annuitant is the person on whose life expectancy it bases the contract. Besides, it is common for the annuity owner to name him or herself as the annuitant. But, sometime an annuity owner may elect to name a younger representative as the annuitant to stretch out payments and extend the tax liability.
Summery Purchasing Structured Settlement
Purchasing structured settlements is a legitimate way to diversify your investment portfolio. Besides, they offer relatively high yields; besides, the asset promise secure payment spread over a long term, structured settlements can balance the modest returns from stocks and shares.
However, no investments are risk-free. Still, structured settlements are highly illiquid that can be a problem for an investor looking to cash out quickly,
Besides, no insurance companies are immune from financial crises. As a result, many investors choose to minimize their exposure by only investing a very small portion of their portfolio in structured settlements. As with all investments, it is important that you build a portfolio that suits your circumstances and with a risk profile that you are happy with.
- Edwards, J. Stanley (2009). Tort Law for Legal Assistants. Clifton Park, NY: Cengage Learning. pp. 197–8. ISBN1-4283-1849-6.
- ^Hindert, Daniel (1986). Structured Settlements and Periodic Payment Judgements. New York, NY: Law Journal Press. pp. 1–36. ISBN 1-58852-037-4.
- Johnson, Denise (5 August 2013). “The Beginnings of Structured Settlements”. Claims Journal. Retrieved 5 September 2017.
- Sell Settlement Payments