Welcome to SettlementSpecialist.com – my name is Jeff Greenfield and this website and I are here to answer your questions about the complex and important world of structured settlements and some of the parts that make them work, such as annuities and taxes.
Rather than create a big website with lots of short pages for you to search through, this site is all in one location. It is written in a question and answer format and all you need to do is to scroll down to find the question that most suits your situation and there will be an answer waiting for you.
What Is A Structured Settlement?
A structured settlement is a way to receive a lump sum payment in multiple parts – or as an income. For many people, receiving an annuity or a payout from a legal suit, for example, is much better for them as an income than as one large check.
This payment might relate to an accident, for example. A “small” accident from which a person might recover reasonably quickly may receive a judgement large enough to cover the immediate medical costs. But, what happens if the injury is more serious? Some accidents cause lifelong damage to the victims who now need care, income replacement, emotional support on top of the initial medical bills. These more serious issues are often termed as catastrophic injuries. In these kinds of situations, the law firms and medical staff will try and estimate the expected lifetime costs that the victim will need to be supported.
The structure of the settlement is generally negotiated, meaning that if it is a part of a legal settlement, for example, and so the recipient has a say in the process of when those payments will be made. It will be the result of a negotiation so both parties must agree to any arrangement. Therefore, payments might be monthly, quarterly, annually, or on some other prearranged schedule. This means that in whist most agreements are quite standard, almost anything is possible and there is no fixed definition to guide us.
From there follows all sorts of other possibilities. For example, it is possible to sell these payments as a lump sum, because some people have received a payment and then at some point in the future they need a lump sum of money. This means that it is possible to buy and invest in structured settlements too. This site will look at the market to help you understand what is a structured settlement and find a good way forward for your circumstances.
It is worth noting that these are generally very low risk arrangements. Any product designed to pay a fixed income, needs to be very low risk. There should be no need for any sort of unusual or high risk elements to these products. If you are interested in this subject because you have a high tolerance for risk, you probably ought to be considering other parts of the financial services sector.
Why Do A Structured Settlement?
There are some very sensible reasons for this. For example, for most people a one-off payment will be taxed very heavily causing the lump sum to be worth much less. While the income paid will also be taxed, the burden is easier to bear when it is spread out.
Preventing human nature is also a very important aspect of this market. Research shows that around 80% of lottery winners are in a worse financial situation after five years than they were before the win. This is because most people are not accustomed to large payouts and so we make poor decisions under the often false impression that the money will last forever.
Please don’t think that I am making a judgement – I’m sure that I would fall into that 80% as well and would be poorly equipped to handle sudden wealth. This seems to be human nature, after all, and if this is a way to protect ourselves from ourselves, then I’m all for it.
The size of some legal payouts provides similar issues and while a lottery win may feel very different, our minds interpret it the same way. Whilst any one of us might be able to handle the new wealth easily, statistically we are unlikely to do a good job or feel all of its benefits. So, taking the issue away from us will make a great deal of sense for many people.
There are also potential tax benefits to receiving your payment in a structured form. Back in the 1970s the IRS made a number of important rulings that meant that if a payment structure met certain criteria, there would be no Federal income tax applied. We will look at those criteria below.
What Is An Annuity?
An annuity is an agreement, a contract, between an individual and an insurance company. An income for life is purchased by the individual and that income will be paid monthly, quarterly or annually by the insurance company. The income would normally be purchased with a lump sum payment – for example, by using funds saved up over decades for retirement – but there are some types of policy that enable the individual to buy using regular payments.
It is important to get at least a general understanding of an annuity because the legal contract of a structured settlement will usually involve the purchase of an annuity as part of the terms.
Why Use An Annuity?
Annuities are interesting for investors because of the certainty that they provide. An income for life without needing to make complex decisions in a person’s twilight years can be very attractive. Once the initial payment has been made and payout terms agreed, income should be paid like clockwork every month.
How Are Annuities Priced?
Life insurance companies use complex actuarial models to predict how long a person is likely to live. This estimate is based on their age, gender, current health and lifestyle – issues such as smoking can shorten a person’s life expectancy considerably. As you might imagine, an income for life can cost widely differing amounts based on how long a person lives. This is the risk and reward tradeoff that the life company makes.
Are Loans Against Lawsuits And Loans Against Settlements Possible?
Let’s be clear, on a TV drama, a court case will be wrapped up within a 30 minute segment. Some take an hour. In reality, a lawsuit can take years to complete. If a lawsuit only took months, it would be considered to be very fast. This means that there can be very significant delay between an accident or injury, for example, and the compensation being paid to assist with the costs and treat or solve those health problems.
So it makes sense to ask whether it is possible to take a loan in advance of a settlement or during a lawsuit. For many families, health bills will cause a severe financial strain which might result in personal loans or using credit cards. We have all read articles explaining how the rates of bankruptcy in America are related to health care costs.
What Is Pre-Settlement Funding?
One potential problem with taking a loan against a lawsuit or settlement is that the case verdict might not be in your favor. If someone needed the money before the legal judgement was made, will they be able to repay the loan if the case is lost? Then what?
A solution would be sell a portion of the judgement. This would mean that an investor would assess the merits of the lawsuit, decide whether or not they think it will be won, and if they do, make an offer to the injured party. This money would most typically be used to cover medical bills.
This solution is known as pre-settlement funding and there are businesses that specialize in this type of investment situation.
Presettlement funding is designed to solve the problem mentioned above. If the case is not won, then there is no loan to repay. The investor takes a risk that the lawsuit might be lost. If however, the lawsuit is won, the investor will receive a percentage of the financial judgement.
The investment companies each have their own way of working, but it is typical that they will want a 15-20% share in the financial recovery in return for their financing. If additional money is needed later, but before the lawsuit has completed, the case can be reassessed and in some cases extra money can be made available for a larger share in the recovery. For many people this will be a much better option than a loan against a settlement.
How To Negotiate A Structured Settlement?
Firstly, as mentioned above, the courts are normally involved in this process. Sometimes they are negotiated as a way to reduce the overall costs, or to avoid a trial. This means that you should not worry too much about how to negotiate a structured settlement because your lawyer should be helping you the entire way.
On the the side, it is very likely that your lawyer will be negotiating with an insurance company. The insurer is representing the defendant.
Since they are often the result of injury claims or product liability suits, there is a great deal of existing law that will make it unlikely that your case will be unique or have to tread new ground. This should make everything much easier for you.
How Safe Are Structured Settlements?
From the defendant’s perspective, long-term payments can be a problem because the company will need to administer and account for them for many years to come. This means that it is often the preference of a defendant to make a one-off payment to the plaintiff. However, it might be in the best interests of the individual to accept an income.
Since a company is likely to want this liability off their books, it is quite common for an annuity to be purchased. This is then arranged to pay out the income at scheduled times. It also removes the risk of insolvency, bad trading conditions or nefarious behavior for the receiver, since the money will be paid by an insurance company and not subject to the whims of company directors in the future.
This does not guarantee safety for decades to come, because life insurance companies can be sold or go broke as well, but it ought to reduce the risks of non-payment substantially. In other words, in most circumstances, if you want to understand how safe are structured settlements then an analysis of the life insurance company will be necessary.
How Does Funding Work?
The insurer will purchase a “qualified funding asset”. Originally, these were considered to be US debt obligations (Treasuries). These generally provide very limited options for income payments, which is not how our day-to-day lives work. It is this required flexibility that makes annuities more popular as the funding option.
How Does A Structured Settlement Annuity Work?
An annuity is a life insurance product that is designed to provide a regular – either monthly, quarterly or annual – income. This is provided in return for an initial lump sum payment. The terms will vary, but most annuities are designed to make payments for the lifetime of the recipient. They are generally used as a tool in retirement planning, but are also useful in other areas of personal finance.
When used for retirement planning, the current age and health of the recipient are taken into account and assessed by actuaries.
In the case of a structured settlement annuity, the insurance company representing the plaintiff should make all the necessary arrangements to comply with the terms of the legal agreement.
Is My Structured Settlement Taxable?
Whether or not a structured settlement is taxable will depend on the exact circumstances of the claim. You should seek professional advice about your situation, which we are happy to provide for you. However, in a large proportions of cases, your payments will not be taxable.
Why is this?
Under the Taxpayer Relief Act of 1997, Congress added employee compensation covering physical injuries that were suffered in the place of work. Any damages being paid as workers compensation, or for personal physical sickness or injury are free of income tax under IRC section 104. Once an agreement has been made between the two sides, the full amount of the periodic payments are considered to be tax free damages.
This is important because if these damages were not tax free and the recipient were forced to pay income tax on them, then the total amount of the required settlement would need to be much higher. This is because the lump sum would need to generate enough money for taxes to be paid and for the plaintiff.
Who Are The Main Structured Settlement Companies?
DRB Capital is an established buyer of structured settlements. I joined the company because of their reputation for the double whammy of charging lower fees and getting higher payouts than the sector average. The firm is based in Florida and is able to help individuals, families and small businesses.
One of the earlier firms in the market is J.G.Wentworth, founded in 2002.
Based in Las Vegas, Olive Branch Funding launched in 2010.
Annuity Transfers was founded in 2002.
Launched in 2002 in Maryland, SenecaOne (also known as Lump Sum Capital).
One of the earliest firms in this sector is Annuity.org, which was founded in Fort Lauderdale in 1998.
In conclusion, I joined DRB Capital for a good reason and I remain pleased that I did!
Why Is It Possible To Sell Structured Settlements?
The reality for us all is that life happens. The idea behind these plans is great and they help many, many people to arrange and plan for their financial future. However, there are times when, perhaps years later, circumstances have changed, life has happened and we have to sell payments in the future for cash now. This might be for a family member, perhaps to make a large purchase, or for some other reason.
I have met people that wanted or needed to buy a new property, people that wanted to send their children to college, people that had expensive medical bills to pay, and on and on. There are many reasons to need to sell a policy, not all of them are good, but if life throws a curve ball at you, sometimes, this is a good solution.
Whatever that reason might be, the financial services sector has, of course, found creative ways to make it possible to sell structured settlements and raise cash now. The market is quite active for these kinds of deals with analysts and attorneys looking checking terms and conditions to approve sales and purchases.
What Is The Process For Selling Structured Settlements?
There are essentially five stages that will need to be completed when selling structured settlements.
The first is simply that you make your decision to sell. It is hopefully obvious that any sale will be legally binding, so it is important that you fully assess the impact that a sale may have on your finances.
The second stage is that you investigate the companies in your market (this might be an agent, an attorney or a broker to help you sell. Ideally, whomever you select will have their own money fund, be reputable and well regarded and is experienced in completing the transfer process. As well as their services, you should be interested to learn the discount rate and the likely fees to be charged.
The third stage is to make a selection of which company you will work with. The firm you select will help you to start the paperwork process. This will include your annuity policy, the legal agreement, benefit’s letter, personal ID and an application form. The company should help you to ensure that your paperwork is properly completed.
The fourth stage is to have the application approved by the court. There is obviously an application process that the court takes you through. You will usually be expected to justify your reasons for sale. The judge will not want to see any sale put the well being of you and your family in danger.
The fifth and final stage is to complete the sale. If your reasons are sound and the paperwork is in order, the judge will normally approve the transfer application. At this point, the judge signs the order and the paperwork will be forwarded to the insurance company to process the transfer. You will likely receive your money by wire transfer.
How Can I Get A Quote To Sell My Structured Settlement Payments?
If you wish to investigate the value of your own policy, by understanding the current annuity rates, please get in contact with me and I will be very happy to help you if I can. If I am unable to help you, I can recommend you on to one or more well regarded brokers that I know that will be able to assist.
Who Is The Most Likely Structured Settlement Buyer?
Firstly, without trying to be too obvious, if an asset is purchased at the right price, then it will be possible to make a profit in the coming years. However, companies that buy annuities and structured settlements are a lot more sophisticated than that. There are a wide range of potential purchasers, but one group of companies that buy annuities is more important than the others.
Why Make Structured Settlement Investments?
If you think about the nature of a settlement or an annuity, it is actually a guaranteed revenue stream. Unless something happens to the annuity provider, payments will be made on a preset schedule years into the future. This means that if you have assessed the provider and believe that they will be sound and still operating during those future years, then you are purchasing a cash flow.
What purchasers need to buy cash flows?
Pension providers need to make regular payments that continue for years into the future and would want to buyout annuities and structured settlements. If you think about it, there are thousands of government, organizational and private pension schemes, so this is a big potential market. Additionally, these schemes have a lot of money available, so they can raise the cash for big lump sum purchases quickly.
The above might make you think that they are a great investment. They can be. However, annuity products generally pay a higher rate of commission to the financial adviser that sells them when compared to most other investment products. This means that there have been many instances where they have been sold to clients, but there were other, more suitable products available. Annuity based products are not always the right solution and it is important that you seek out professional advice before making any financial commitments.
There are also firms that take advantage of the complexity of the market and people’s lack of understanding of it. They use their advantage to buy settlements much more cheaply than they should and make a lot of money. These predator firms give the sector a bad name and I hope that you will protect yourself by conducting lots of research and making a very careful choice when deciding upon a company to work with.
After all that, I hope that this page helps you to make more informed financial decisions.
If you would like me, or the company I work with, to help with that process, I would be very happy to.