What Caused the Rise of Structured Settlement Buyouts?

What Caused The Rise of Structured Settlement Buyouts?

Structured settlement payments have become the norm in personal injury claims and a number of other types of lawsuits. Several factors make structured settlements the typical settlement these days. First, in the past, some settlement recipients spent lump sums of cash quickly, leaving them unable to meet living expenses. Second, tax laws added provisions treating structured payments more favorably. Third, insurance companies and other payers found that arranging structured payments was less burdensome than making lump sum settlements. However, these considerations do not apply to everyone, or forever. Even if a lump sum of cash would serve you best, you may end up with a structured settlement.

Thousands of new settlements are created every year. Tax incentives lie behind the popularity of structured settlements. These incentives are available both to insurance companies that establish "qualified" structured settlements as well as to the payment recipients. The other advantage of structured settlement payments is that the money is paid out over time rather than in a large lump sum. Traditionally, receiving significant sums of money result in a higher rate of financial difficulty for the recipient than do periodic payments.

The cost of arranging structured settlement payments is lower for insurance companies than making immediate full payment. Therefore, insurance companies have an incentive to persuade claimants to accept structured settlements; they make more money with such an arrangement. In turn, annuity fund investments can appreciate in value and provide greater returns to the annuitant. All of these factors made structured settlements attractive in most cases.

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Structured Settlement Payments Are Inflexible

To achieve "qualified" status and receive tax benefits, the settlement must include provisions that make the structured settlement payments inflexible. Once settled, the agreed-upon payment amounts and schedule of payments cannot be changed. In some circumstances, structured settlement recipients may find the inflexibility of their settlements too constraining.

The settlement payee or a close dependent might fall ill and might need a substantial sum of cash might to pay for expensive medication. An investment opportunity might appear that promises definite returns. In such cases, the inflexible nature of structured settlement payments could prove a serious problem. Other uses for a lump sum payment might include:

Structured Settlement Factoring Services Appear

In response to the widely-felt problem of inflexible structured settlement payments, new kinds of factoring services appeared in the market. Traditionally, factoring companies bought future payments due to a business, such as accounts receivable, and paid immediate cash. Some firms began to offer factoring services to annuitants, buying out their structured settlement payment rights and paying them immediate cash.

Initially, insurance companies were hostile to this new development. They were not being notified of the assignment of their payments, and feared that factoring might affect the favorable tax treatment of annuities.

Legislation regularized the assignment of the right to structured settlement payments. Provided the transaction is made in a transparent manner and was in the best interests of the annuitant, the law imposes no tax penalties on the sale of structured settlements.

To qualify for tax advantages, the sale of structured settlement transaction requires (i) disclosure of the details of the transaction to the seller, (ii) giving notice to specific interested parties, and (iii) court approval to the transfer. Some states have also made it mandatory for the annuitant to discuss the transaction with his or her attorney. State mandated time frames set limits for the various stages of the sales transaction. Before approving the transaction, a court determines whether the transaction is in the best interests of the annuitant.

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Integrity of the Factoring Firm Is Key

Although laws have made selling the right to structured settlement payments safer, it is still important that you, the annuitant, deal with a firm with integrity. The firm must have sufficient financial strength, or funding sources, to pay you the agreed-upon lump sum payment in time. The firm should tell you up front what to expect and how to proceed.  You should expect to deal directly with funders and not middlemen, such as brokers or agents. You should also demand a high level of processing and court experience.

Good firms help you through the process, offering flexible plans to meet your specific needs, and presenting the best and most beneficial to you.

Contact Us Today for a Free Analysis

If you would like to learn more about selling structured settlement payments for cash, contact Structured Settlement Investments.

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