Structured Settlements: Going to the Source for
Better Returns

By Burt Kroner, President and CEO of Client First Settlement Funding

The use of structured settlements has risen dramatically in the past twenty years. A fixed rate structured settlement annuity is often created in connection with the settlement of a personal injury lawsuit.

In a typical transaction, the defendant and plaintiff reach a settlement which provides for the plaintiff to receive periodic payments over a period of time. Previously, claimants were presented with the option of an immediate cash settlement, which created significant tax related burdens, and did not always address the long term needs of the plaintiff.

The most significant downside for a plaintiff with a structured settlement comes from its inherent inflexibility. In ways unforeseen at the settlement table, the plaintiff’s financial needs often change over time resulting in a demand for liquidity options.

Beginning in the late 1980s, a few small specialty finance companies started meeting post settlement liquidity demands by offering new flexibility for structured settlement payees through a lump sum cash payment to the plaintiff in return for some or all of the rights to the plaintiff’s structured settlement payments.

Whenever an individual annuitant, who is receiving periodic payments under a structured settlement, desires to sell some or all of their future payments for a lump sum of money, the cash flows can be sold - often at a discount - in exchange for a lump sum immediate payment. This discounted structured settlement is then made available to potential purchasers.

This manner of securing the payment streams at a discount directly from the seller is how the purchaser secures very favorable yields. These structured settlements normally earn more than 2 times the yearly rates of Municipal or Corporate Bonds, Bank Issued Certificates of Deposit (CD’s), or Government Issued Treasury Securities. This transaction is normally facilitated by a financial broker on behalf of the seller (or annuitant) and the purchaser.

Why Purchase Direct?

Investors can certainly purchase an annuity directly from an insurance company. These direct annuity investments are backed by the same insurance companies as the structured settlements arranged by a broker. However, they are typically originated with large sales charges or commissions and have substantially lower yields. Purchasing the structured settlement directly from the original annuitant offers many other advantages as well.

• The investment may receive significantly higher yields compared to comparable fixed rate investments.
• The settlement provides a fixed income over a defined period of time.
• Purchases can be made to increase yields in personal holdings, maximize income in retirement or to preserve principal for future years.
• The structured settlement is backed or supported by annuity contracts issued by a rated insurance carrier. The insurance carrier that issued the annuity contract is state regulated and will generally have a Standard & Poor’s credit rating between “A-” through “AAA”.
• The purchaser has control throughout the investment process. Structured settlement payment rights are directly assigned from the seller through a court approval process, and the purchaser receives the future cash flows directly from the rated insurance company.

Making the Purchase: Step-by-Step

The rights to the future payments can only be transferred from the annuitant to the purchaser by court order, as mandated by state law. Financial brokers typically engage a legal counsel to meet the requirements of each state. Part of this court order process requires confirmation from the judge that the transaction is in the best interests of the annuitant.

A broker facilitates this process by working directly with the annuitants and local legal counsel. The local counsel arranges for all the appropriate contracts and agreements between the seller and purchaser, ensures that all state and federal requirements are being met, and ensures that the insurance company or assignment company acknowledges or stipulates that the purchased payments are being redirected from the seller to the purchaser.

Also, the broker arranges for the retention of independent legal counsel, who will be engaged to secure a court order approving the sale of the structured settlement payment rights from the seller directly to the purchaser. The court order will specify that all of the purchased payments are to be paid directly to the purchaser from the insurance entity.

It typically takes 2 or more months to complete a purchase and sale transaction from the time that the broker reaches an agreement with an individual to purchase his or her structured settlement payment rights and when a final court order is obtained approving the purchase and sale transaction.

Finding the Right Fit for You

These transactions vary in size from approximately $10k to well over $1M in principal invested. There is also a wide variety of “start dates” and “end dates”, providing a wide range of cash flow durations.

These cash flows are NOT volatile, and can be expected to be received as agreed to. Purchasers can choose which structured settlements meet their specific objectives. A purchaser can purchase assets backed by different insurance entities, of different sizes, with different durations. Fixed income annuities can also be purchased for an individual investment portfolio through self-directed retirement accounts. The purchaser can choose an asset that has a specific start date, ensuring income in retirement.

In each state, there have been thousands of approved transactions where plaintiffs have sold their lump sum payment. The market is established, and processes exist in each state to successfully complete these transactions.

Fixed rate annuity backed structured settlements are not typically offered directly to the general public, except in connection with the settlement of lawsuits and certain other limited circumstances. Therefore, they provide a unique opportunity for sophisticated and cautious purchasers to secure safe fixed returns at superior rates of interest.

Disclaimer: Equity Trust is a passive custodian and does not provide tax, legal, or investment advice. It does not endorse or recommend any contributor, company, or specific investments. Any information communicated by Equity Trust Company is for educational purposes only and should not be construed as tax, legal, or investment advice. Whenever making an investment decision, please consult with your legal, tax, and accounting professionals.