A structured settlement is a payment made to an injured person on a regular basis, either monthly or yearly, over a period of years instead of a one-time payment when a lawsuit gets settled. Settlements like this usually result from wrongful death, personal injury, or medical malpractice claims. For the recipient of settlement payments, who are often referred to as annuitants, the fixed payment schedule has many benefits but also has several drawbacks. Once the individual agrees to structured settlement payment arrangement or annuity, he or she is locked into it in terms of the schedule – they cannot alter the structured settlement payment structure in any way. While the structured settlement may work in the short-term, the illiquidity of the settlement payment schedule provides no flexibility as his or her financial needs change over time.
Over time several companies have come into existence that will provide structured settlement payment recipients with a large lump sum in exchange for some or all of the annuity payments. Essentially, the recipient of the settlement, who has an immediate need comes to an agreement with these companies to accept a lump sum payment today instead of waiting years and years for the payments to become due under the payment plan. The reasons a person wants to sell some or all of their annuity payments for immediate cash vary greatly.
Many of these companies that originate “structured settlement transactions” are brokers that match the settlement recipient with an investor. In recent times, private individual investors, as opposed to institutional investors, have shown more and more interest in acquiring these types of payments in this secondary market. In many cases it is an attractive opportunity as a structured settlement acquired from the secondary market can pay a better return than a similar annuity.
While purchasing settlement payments in the secondary market can be desirable for an investor, due diligence is required. From the perspective of investors, the critically unique aspect to contemplate in acquiring this type of investment in the secondary market is the quality of the brokering company’s underwriting and its compliance with the various applicable federal and state laws. Compliance with the legal framework in this area is essential in order to ensure that the investment pays in the future, so the brokering company’s experience with these types of transactions becomes very important. Ensure that the brokering company has experience with the state’s laws since they do vary from state to state.