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Why do People buy Structured Settlements Anyway?
It is hard to believe but structured settlements have become a popular investment in recent years. Many investors are purchasing what are called factored structured settlements or secondary-market annuities.
These investments are popular because they can offer a guaranteed rate of return for up to 20 years. The returns from structured settlements are not pegged to inflation like those from Treasury Bonds; this means they often pay between 5.75% and 7.75% while treasuries are paying 3% to 4%. Such annuity are also very secure because they are issued by major insurance companies such as New York Life which are among the oldest and most stable companies in the United States.
What this means is that the annuities that many people receive to settle a lawsuit or an insurance claim are actually a very valuable investment. There is a growing pool of buyers interested in purchasing such vehicles because of their security and potential return.
The Wall Street Journal noted that there has never been a case in which the purchaser of a structured settlement annuity did not receive the payments. In addition to insurance companies, annuities are also guaranteed by state governments. Many investors like the guaranteed return and the high dividend.
How a Structured Settlement becomes an Investment
The process by which a structured settlement becomes an investment is actually fairly simple. The beneficiary or annuity simply sells his or her right to receive annuity payments to a factor or buyer. The factor buyer then resells the same annuity to a stockbroker or insurance agent that sells it to the public. In most cases, a court order from the judge that approved the original settlement has to sign off on the deal.
The factor will also have to determine whether the recipient still has the right to sell the annuity or not. There have been cases in which recipients have tried to sell the same settlement over and over again.
The growing market in structured settlements creates an interesting opportunity for persons receiving structured settlement payments. Individuals that no longer want to deal with the plan’s restrictions can sell it for a lump sum of cash.
Unfortunately, the individual sells all of the advantages he or she gets with the annuity along with the payments. He or she will lose the guaranteed income and often take a loss on the deal.
Buyer’s Market for Structured Settlement Annuities
This also means that there is something of a buyer’s market for structured settlement annuities right now. The low return on Treasury Bonds and the collapse of mortgage securities has many investors looking for alternatives. Structured settlements are a popular alternative because of their security and high returns.
People looking to sell structured settlements now have a wide variety of alternatives. It also means that many people will be able to get a much higher price for their structured settlement than just a few years ago.
To get the top price for a structured settlement annuity, a person will have to shop around. Fortunately, many factors now operate websites that offer a free quote on the potential price of an annuity. By comparing the quotes, a recipient can receive top dollar for the annuity.
J.G. Wentworth, the largest buyer of structured settlements in the United States, raised $169.5 million worth of securities to use to purchase such settlements. Wentworth alone has purchased $4 billion worth of structured settlements since it entered the business in 1992. Wentworth is only the company in a growing field of structured settlement factors.
Even though the market for structured settlements is growing, the cash amount that a recipient will receive for such annuity will usually be a small percentage of the vehicle’s total value. The investor gets the better end of the deal. Many people will wonder why individuals sell settlement in the first place.
Turning Structured Settlements into Cash
The answer is very simple: the recipient usually receives a lump sum of cash that is equal to a large number of annuity payments. Most recipients sell such settlements because they want or need the cash right away.
There are also some cases in which selling the settlement for cash is a better deal for the holder. Some structured settlements are set up so that only one individual can receive the payments over the course of his or her lifetime. Such a plan cannot be inherited by the individual’s family. The payments will stop when the holder of a structured settlement with life-contingent payments dies.
An older person that holds such a settlement might actually receive more money from the lump sum of cash than from the structured settlement payments. The funds could be used for other purposes such as purchasing long term care insurance.
Many families use cash from the sale of a long term settlement to pay off debts or replenish savings wiped out by unemployment and other unforeseen circumstances. A family or individual with another source of income such as a job or disability payments might be better off using the cash from an annuity sell to pay off debts such as the mortgage rather than to keep receiving the payments. The increasing cash value of such settlements often makes this arrangement preferable to receiving the payments.
An individual thinking of selling a structured settlement should carefully examine the market and get quotes from several different buyers before selling the annuity. That enables the seller to get top dollar for the annuity.
It should also be noted that the buyer’s market for structured settlements may not last much longer. If the return on other investments such as treasury bonds starts increasing again, much of the appeal of the settlements will be gone. Demand and prices for structured settlement annuities could start to fall.
Even though structured settlements have become a popular investment, there is no guarantee that a strong market for them will exist in the future. Yet there will still be demand because few other investments offer the security and guaranteed return associated with such settlements.