On occasion, we run across articles about acquiring structured settlement payments from third party factoring companies. The tale follows much of the same path: Kathy Winter, sometime in the past settled a personal injury lawsuit but instead of taking the money all upfront Kathy elected to accept payments over time from an annuity company. These arrangements are commonly referred to as structured settlements. The structured settlements are generally paid by well-known and credit worthy annuity issuers.
The tale continues that years later Kathy decided the structured settlement payment stream no longer meets her needs and has elected to liquidate the stream for a lump sum. In order to accomplish this liquidation, Kathy contacts a structured settlement buyer and negotiates a purchase price for some or all of her payments. Before the funding company can pay Kathy money, however, the funding company must get the transaction approved in court in the state where the Kathy lives.
The tale of the assignment of a payment stream does not end just yet. Many, if not most, funding companies do not actually “buy” the structured settlement payment streams but instead after agreeing to terms with Kathy and market the payment stream to institutional and, more and more commonly, individuals. In short, Kathy’s payment stream is marketed to individual buyers as an alternative to the acquisition of annuities from annuity issuers like: Berkshire Hathaway, Allstate, Metlife and others.
But is the annuity stream acquired from Kathy identical to that acquired directly from the annuity issuer? Not exactly. By purchasing an assigned series of structured settlement payments through this process they buyer is not (and this is critical) purchasing an annuity. You are not becoming the annuity owner or having many of the other rights of the annuity owner instead the buyer is only receiving the payments otherwise due to Kathy.
Furthermore, there are liquidity issuers with this type of purchase. As noted in the tale above, a court has to approve the sale of the structured settlement payments from Kathy to the funding company. If the court does in fact approve the transaction than a court order is entered. This court order is very specific and directs the annuity company to send Kathy’s payments to the funding company’s assignee (the actual buyer) and to a designated address of the buyer. This court order is final in the sense that it is very hard (if not impossible) to go back and modify the designated assignee if circumstances change and one wishes to offload the asset.
Lastly, unlike when you buy an annuity directly from an issuer, risks do exist in connection with how the funding company complies with the law in relationship to getting the court ordered assignment related to Kathy’s structured settlement. In recent years there have been some challenges to the enforceability of court orders based on the funding company’s compliance with state law. While these challenges and the success of the same are few and far between in comparison to the overall number of transactions, it is important to note the risk does exist unlike when you buy annuities directly.
Does buying Kathy’s settlement annuity payments sound like a tale you want to avoid? Not necessarily. Like with most things, there is a great deal of upside to acquiring structured settlement payments. Generally speaking, the rate of return to acquire these payments is much higher- even double the rate of return- then you would find if you bought an annuity. And while liquidity is limited, the acquisition could be a good compliment to a well-rounded portfolio. After all when CDs and annuities are providing such abysmal returns, we all need to think out of the box a little.
In sum, whether to buy Kathy’s future annuity payments is worth a tale worth exploring with your advisor. Even if not right for you, there may be some lessons to be had in the exercise of evaluating.
Kathy Manson is a Finance Coach and Blogger. Currently, she is working on cash for structured settlement at http://www.catalinastructuredfunding.com. She is very proactive and aware about each and every update of financial changes in the industry. On Twitter @ structuredfund