Many individual investors, as well as financial professionals, are unfamiliar with the opportunity to buy structured settlement annuity payments in the secondary market. While with all investments certain risks exist when buying what are often referred to as “secondary market annuity payments”, a savvy buyer might be able to find a greater return with this product than they could by acquiring annuity payments directly from annuity issuers.
At the outset it is important to review what a structured settlement actually is. A structured settlement is a type of out of court settlement of a civil lawsuit that involves the Plaintiff accepting deferred compensation from the Defendant instead of a lump sum upfront. The deferred compensation may be monthly payments, annual payments or lump sum payments due in the future. This settlement mechanism is utilized for not only the most serious cases but often in connection with basic personal injury lawsuit. In order to effectuate the resolution, the Plaintiff requires that the Defendant acquire an annuity to pay the deferred payment settlement. These annuities are issued by companies like Berkshire Hathaway, Allstate Life Insurance Company, American General Life Insurance Company and other well-known companies. Once finalized, these annuities cannot be modified by the parties so the Plaintiff (now the “Payee”) is locked into the schedule of payments he agreed to.
The opportunity for buyers to acquire some or all of the structured settlement payments from the Payee arises when the Payee’s circumstances change and is in need of an immediate influx of cash instead of waiting on the deferred payout plan. When such a situation arises, the payee will reach out to a factoring company and the factoring company will make an offer to purchase some or all of the structured settlement annuity payments in exchange for paying the Payee a lump sum of money. If the payee and factoring company agree to a transaction, the factoring company must file the contractual documents in the county state court where the payee resides and get a judge’s approval to acquire the payments from the Payee. This process has been established by Federal law working in conjunction with statutes passed by most state legislatures.
Factoring companies, however, do not technically buy the annuity payments from the Payee. Instead, they work as brokers and after the Payee agrees to the terms of a transaction, the factoring company look for a willing buyer or “assignee” of the structured settlement annuity payments. In other words, the factoring company makes its profit by finding a buyer of the deferred payments that is willing to pay more for the payments than the Payee has agreed to sell the same to the factoring company for.
Historically, most buyers/assignees of secondary market structured settlement payments were large institutional investors including banks. These banks issued lines and the factoring companies aggregated these assigned payments until the mass of payments was large enough for a securitization. In time, individual buyers emerged as another group that wanted to acquire these annuity payments in the secondary market instead of buying an actual annuity directly from the issuer. The reason for the interest was that, generally speaking, the rate of return on payments in secondary market was substantially more than one could find when working directly with the annuity issuer.
While the rate of return of associated with these payments is appealing, any potential buyer must vet out in great detail whether this is a suitable acquisition. There are potential risks, including the creditworthiness and underwriting of the factoring company, associated with the assignment of these payments. Any buyer would be wise to speak to multiple outlets working with these payments and gather as much information as possible before proceeding. In addition, if one proceeds it may be prudent to have a lawyer familiar with the product underwrite the file before funding any transaction.
Kathy Manson has completed graduation from Boston College with a Financial Management Degree. She worked for a big finance firms as Catalina Structured Funding, Inc. & SelectFunders.com She is very proactive and aware about each and every update of financial changes in the industry.Wishing you well,
Daniel R. Murphy
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