News and Tips on structured settlement transfers.

You may be frustrated at the generally low interest rates being paid on most conventional investments, and are looking for something else.

The structured settlement industry had a great year in 2010.  If you’re looking for a huge rate of return, purchasing structured settlements might be a way to make your money work harder for you.

Structured settlements take many forms, from personal injury lawsuits to lottery awards.  But the basic premise remains the same:  A lump sum is placed with an insurance company, who invests the money so that it will earn enough interest to make a fixed stream of payments at some time in the future.  Lawsuit defendants love structured settlements because it allows them to set aside less than the court-ordered settlement amount, and also gets rid of the responsibility of managing the money and the payments.

For the annuitant, the chief benefit of a structured settlement is the peace of mind in knowing that a steady stream of income will be coming their way. 

However, because of impending foreclosure, medical expenses, or some other reason, an annuitant may decide he no longer wants to wait for his money, and he wants to sell.  If you’d like to get in on that action, what should you do?

Have some cash.  You’ll need a stockpile of cash in order to pay the annuitants for their payment streams up front.  If you don’t have the cash available, you’ll need a good financing arrangement that will allow you to get it when needed, and creditors who understand the business of structured settlements.

Know the Law.  All states have laws governing the sale of structured settlements, designed to protect the annuitant from charlatans who would purchase his annuity too cheaply.  If you’re serious about buying annuities, you’ll need a good lawyer with an understanding of the process in your state.  Realize that sellers of annuities are encouraged to get legal and/or financial advice, so if you try to take advantage of a potential seller, you might wind up empty-handed.  Even if the seller signs off, a judge can always nix the deal if you’re trying to get too much for too little.

Discount Rate.  And that brings us to the discount rate.  Structured settlement buyers (that’s you) discount the total amount of the payment stream in order to determine how much you’ll pay the seller.  While this rate is often in the double digits, don’t think you can set any rate with impunity and expect the seller to accept it because he is desperate.  Even if he does, the court can reject your offer.

Know the Players.  A site like QuoteMeAPrice gives you a great forum to shop your best deal to prospective buyers.  But understand that you may have to float a better deal to get past some of the big players in this market.  There are big names and they have big reputations; even though there are complaints against them, sellers have heard of them, and that name recognition is huge.  So, you may have to make better offers that aren’t profitable just to get noticed.

If you plan to sell your structured settlement, the official name for this is a structured settlement factoring transaction.  The factor is the buyer of your settlement.

Factoring – where a buyer purchases the right to receive future payments from a third party – happens in lots of industries other than structured settlements.  Lots of businesses who need quick cash will sell their accounts receivable to a factor.  The business gets quick cash, and the factor gets to collect from the customers.

Why would anyone do this?  The answer is the discount rate.  In any factoring arrangement, including a structured settlement factoring transaction, the buyer is not paying for the full amount of the future payments.  Instead, he pays a reduced amount.  By paying you less than what he will ultimately collect from the scheduled payments on your settlement, he makes a profit – and you get the cash you need sooner.

This reduction is called the discount rate.  The discount rate that the factor applies to your stream of payments is, essentially, reverse interest that you are paying in exchange for the ability to get cash ahead of schedule.  The discount rate is intended to compensate the factor for a number of things.  First, he must secure the cash he needs to pay you off.  That means he has to get financing from someone, and that financing costs money.  Even if the factor has the cash on hand, by giving it to you he is missing out on the ability to invest that money elsewhere, so the discount rate compensates him for that, too. 

Factoring is a business, and business involves overhead.  Factoring businesses have offices, employees, and lots of costs to recover.  Since the structured settlement process is strictly regulated and all states have statutes to cover these transactions, factors need legal help in navigating the legal system, and lawyers don’t work free.  They need other people to cut the checks and keep the books, too.  And, of course, the factor wants to make a profit; they are not in business to help you.

So that’s why discount rates are often in the double digits.  Of course, you may not want to sacrifice that much to get cash quick, even if there is a reason for it.  Even if you do, if the discount rate is too high, the court may not approve the transaction.  You always have the ability to walk away from the sale during the “cooling off” period, and sites like QuoteMeAPrice allow you to understand the deal you’ll be making up front.

Wondering about the structured settlement factoring process?  Wondering who comes out ahead when you sell, and who doesn’t?  Well, here’s the scorecard.

The Winners

The Factor.  The factoring company has two things to bring to the party:  time and money.  He’s got the cash to front you for your structured settlement.  And he has the time to wait for the payments you sold to start rolling in.  Since your payments are tied to a structured settlement, which are usually tied to an annuity issued by an insurance company, he’s all but assured to see the cash eventually.  And when he does, the rate of return is far greater than any other stock or bond he could have bought.  Yes, he had to pay for legal advice, and the cash he gives to you he can’t invest elsewhere, but there’s a significant payoff to be had.  All he had to do was wait.

The System.  Most states require you to get advice from a lawyer, and maybe also from a financial advisor, prior to selling.  These folks don’t work pro bono.  Whether you pay the fee or the factor does, they will get paid for their work.  But hey, it’s valuable advice, and worth the investment.

You…Maybe.  This depends on how much you got for your settlement, and what you plan to do with it.  Factors charge a “discount rate,” sort of a reverse interest rate that you are charged in order to get your money ahead of schedule.  You might be planning to pay off debts or start a business.  If your debts are wiped out by the settlement, and no more bills are coming, great.  If that new business takes off, great.  If not, well….

The Losers

You…Maybe.   Structured settlements are intended to provide you with a reliable stream of income over time.  If the settlement came about because of a personal injury lawsuit, and your injuries have left you unable to work, the settlement needs to cover your living and medical expenses.  If you sell, what will you have left?  What will be there to take care of you?

It’s tempting to think that you truly need money now, and your immediate need may well be legitimate if you’re facing life-or-death medical expenses, or foreclosure.  But check your options.  Is there no other way out of your debts?  Is there some other way to fund that new business that’s got you excited?  Don’t trade your future for a quick fix.

When you sell all or part of your structured settlement for cash, this transaction has an official name:  A structured settlement factoring transaction.

Factoring can occur in lots of business situations.  For example, a business might sell its accounts receivable to a factor in order to get cash now, instead of waiting to collect from its customers.  But for purposes of this article, we’ll stick to the factoring of structured settlements.

A factor is a person or company who agrees to buy all or part of your structured settlement in exchange for cash.  You get the cash you want now; the factor, on the other hand, gets a virtually assured stream of future payments that will total far more than the cash he gave to you.  So the factor stands to make a huge rate of return on the settlement you have sold to him.

A factor decides the amount he’ll give you by applying a discount rate to your settlement.  The factor considers his desired profit margin; the costs he incurs as part of doing business; and the cost of borrowing the cash he used to pay you, in order to figure the discount rate.  This is essentially interest in reverse; instead of paying you to borrow your cash, you are giving up a percentage of your settlement in order to get cash earlier than scheduled.

The most important quality in choosing a company to buy your structured settlement is reputability.  Get competing bids from QMAP and check the companies making them.  Do they have numerous complaints from the Better Business Bureau?  Or, by contrast, do you seem hard pressed to find any information about them at all, as if they recently got into the structured settlement business?  You want to make sure your company exists and will be able to come through with a payment when the sale of your settlement closes.  Some sellers of structured settlements have been burned by companies who didn’t pay up when the settlement deal closed. 

A structured settlement factoring transaction follows a process governed by the laws of your state.  Virtually all states require you to get legal and/or financial advice prior to selling, and you may be asked to justify in court why you want to sell.  Be prepared to wait at least 45 days.  Most importantly, realize that the factor is not your friend.  He is not interested in making sure you get a fair price for your settlement, or in making sure that selling is the right thing for you to do.  Ultimately, you, and no one else, are on your side.  Read every document you get from the factor.  Ask your lawyer or financial advisor anything you don’t understand.  Be on the lookout for any subsequent change to the structured settlement sales deal you initially agreed to.

So, you’re thinking about selling that structured settlement.  Hoping to get a big cash payout.  Got big plans for that money.  So, what next?

Your state may require you to consult with an attorney and/or financial advisor (FA) before you finalize the sale of your settlement.  Even if it doesn’t, finding some good advice is a great idea, even if it costs you a few bucks.

What am I really getting?  A good financial advisor can look at the details of the deals being offered to your by competing buyers (if you haven’t shopped your annuity to more than one buyer, do it now – QMAP offers a free and easy way to get competing bids) to give you a good idea which one is best for you.

Should I Sell at All?  A financial advisor will ask you about the reasons why you’re looking to sell your settlement.  A good FA will try to find alternatives to selling.  Remember that an annuity is designed to ensure you can cover your expenses for a fixed period of time, so you should be sure you’ve exhausted all other possibilities before you sell.   A good FA might find something that you haven’t yet considered. 

Dirty Tricks.  When you seek out a financial advisor for help, find one who’s had recent experience in selling structured settlements.  Chances are, he’s seen what buyers try to do to bump up their profits:  change the deal midstream; introduce new “processing,” “legal,” “administrative” fees; or something similar.  The buyer’s costs should be met as part of the deal, so if you’re asked to pay in additional fees, consider this a red flag.

Details of the Deal.  A financial advisor can look at what’s being offered to you, and figure out how you’ll really come out in the end.  The discount rate is what buyers use to scale back the total amount of your annuity and figure out what they’re willing to pay.  A good FA can figure competing discount rates.  The lowest discount rate – although it means the best lump sum payment for your annuity – can be a sign of trouble if the prospective buyer tends to float a favorable offer, only to pull it back later.

Who Are You?  Still, don’t just trust anyone who hangs a “Financial Advisor” shingle outside his door.  All those letters after his name should mean something, and a few quick Internet searches will tell you what.  Ask him specifically about his experience with structured settlements, and find out how recently he’s handled one.