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ANSWERED on Fri 27 May 2011 - 9:51 am UTC by leader

Question: "Structured Settlements" - below is background, followed by the question

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The customer tipped the researcher $30.00

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Tue 24 May 2011 - 5:53 pm UTC

Question

smoky
Customer

Structured Settlements are offered for sale in Florida (and other states) from registered investment advisors and licensed insurance agents. Therefore, I would assume they are legal to sell. (These are not Viaticals). With the structured settlement the investor is able to purchase, at a discount, an income stream.
The income stream can be from a Federal, Military or State employee who retires with a pension, and, for one reason or another, desires an immediate "lump sum" rather than monthly payments. The investor will be assigned the payments via an irrevocable trust. The payments are guaranteed by the respective federal or state agency. Following is a hypothetical example: Purchase a Federal Judges Pension for $232K with a monthly payment of $3,337 for 120 months resulting in total payments of $400K ($168K interest and $232K principal). This transaction includes a title company with a closing statement and a paid for life insurance policy for 10 years on the Judge with a payout of $232K. If the Judge should die, for example five years after payments begin, the investor keeps all the payments previously received and receives the $232K life insurance payout. The closing statement includes assignment of cash flow, excrow amount, closing date, contact info for all parties, funding instructions, amortization table, pension contract or benefits letter, transfer or purchase agreement, certificate of marital status and, if married, notarized spousal consent form, photo identification of seller with drivers license or passport.
The question: "From a legal/financial viewpoint - what are the downsides or risks, if any, to the investor purchasing a structured settlement??"
(Need response by Friday evening 5-27-11 - the researcher does not need to be an attorney.)

Thanks - Smoky

 
 

Wed 25 May 2011 - 1:11 am UTC

Question clarification

smoky
Customer

Does the above statement "Locked for answering" indicate that a Uclue researcher is working on this?

Thanks - Smoky

 

Wed 25 May 2011 - 5:37 am UTC

Request for clarification

leader
Former Researcher

Yes Smoky. "Locked for answering" indicates that a Uclue researcher is working on a question. Currently, I am working on this query. Thanks.
--Leader

 

Fri 27 May 2011 - 9:51 am UTC

Answer

leader
Former Researcher

Dear Smoky:

My research has revealed useful insight to potential drawbacks of structured settlements. After reviewing several pieces of literature, I have concluded that investors should evaluate following conditions before negotiating terms or purchasing such settlements:

The official website of Structured Settlement Trade Association may also be helpful in answering several questions.
http://www.nssta.com/
Literature & Articles
http://www.nssta.com/resources/nssta-brochures-articles

Rigid Terms

Terms for structured payments are usually fixed and provide very little, if any, leeway to change the preset conditions. Unlike loans where the rate of return and other terms can be changed at a later date, market for structured payment is not saturated. Moreover, laws governing these settlements are not conducive to alteration of terms.

Selling of Structured Payments

If for some reason the purchaser of structured settlement decides to sell it at a later date, about two thirds of the US States discourage such practice. Some Federal laws also prohibit selling it to a third party. Furthermore, selling such payments at a later date may bring fewer financial incentives.

Life Expectancy

Payment from structured settlement may cease upon death therefore it is important to review the terms of payment. In your hypothetical scenario, full payment (remaining payment) upon death seems like a viable solution. Just check to ensure that the terms over life expectancy are in your favor.

Loss of some public benefits

Beneficiary of structured settlement may not be eligible for Medicaid, social security benefits, aid for dependent children etc therefore make sure to discuss it with the lawyer/attorney. Here is a good article on this subject:
http://injury-law.freeadvice.com/structured_settlements/social-security-structured-settlement-income.htm

Possibility of Default

If a company, which is conducting the settlement, goes out of business then it is possible that that you may not get the required (remaining) sum. Experts suggest that settlement terms should compensate the beneficiary in this case. Recently, AIG filed bankruptcy and many of its customers had to file their cases in court of law to get remaining compensation from the government.

Duration of Payments

An obvious disadvantage of structured settlements is the duration of payment. Logically, an investor should evaluate other alternate investment opportunities to assess the feasibility of getting monthly payments. May be the investor would be better off by investing the cash in alternate investment opportunities and reap better profits. Similarly, it will take 3-6 months before the investor gets the first monthly payment.

Inflation

Another important aspect of investing in structured settlement is inflation rate. Hypothetically, the investor can only reap full advantage after all payments are made. After 10 years, the investment may not be worth as much as it is today. Therefore, every investor should take into account the inflation rate in the future.

Fairness of Policies

Actually, laws pertaining structured settlements are still not as compact as the law on some other investment opportunities. Some companies/brokers may use loopholes in regulations to restrict your rights or hold the purchasing party (broker/insurance Company) completely harmless. Hence, an investor should make sure that terms are fair and acceptable.

Collateral for Loan

Long term payments cannot be used to acquire loan. The monthly gains from investing in structured settlements cannot be used as a collateral. On the other hand, if investors declare such payments as income, this should have no affect on the eligibility of applying for future loans/collateral etc. In this regard, it is better to consult an attorney.

Interest Rates

As with loans, an investor should make sure that payments will not be influenced by fluctuating interest rates. Purchasing structured settlement and paying monthly payment is a long term process that will likely be influenced by interest rates.

 
 

Fri 27 May 2011 - 2:28 pm UTC

Accepted and rated

smoky
Customer

Leader provided excellent research with my unusual question. Leader's concise and well writted conclusions and literature citations are very much appreciated

 

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