Structured Settlements and Pensions what you need to know

Structured Settlements and Pensions what you need to know

Recently, the Business Insider wrote a blog post for their Financial Insights section where they quoted a recent warning about structured settlements and pensions from the SEC and FINRA.

According to the post,

“Anyone receiving a monthly pension or regular distributions from a settlement following a personal injury lawsuit may be targeted by salespeople offering an immediate lump sum in exchange for the rights to some or all of the payments the person would otherwise receive in future. Typically, recipients of a pension or structured settlement will sign over the rights to some or all of their monthly payments to a factoring company in return for a lump-sum amount, which will almost always be significantly lower than the present value of that future income stream.”

While there is a need to exercise caution and do your research about any financial transaction, regardless of type, there are some important things you should know regarding the sale of structured settlement annuity and pension payments.

1. A Structured Settlement is a financial arrangement that allows court-awarded compensation to be paid in regular installments rather than in one lump sum. These payments provide money for a fixed period or lifetime.
2. Annuities and Structured Settlements are NOT the same thing. Annuities are financial products that provide a series of payments over a specific period of time such as a lifetime. Delivered on a set schedule, these payments can be paid monthly, quarterly, biannually, or annually. Typically, insurance companies sell them. As in the case of a structured settlement, the insurer, or designated third party, purchases an annuity from a life insurance company in order to provide periodic payments to the claimant.
3. The federal government has been encouraging the use of structured settlements for over 30 years. While they were originally used to pay out large settlements in tragic cases, they are now being used to fund cases as small as $5,000.
4. When it comes to selling these payments, forty-eight states and the federal government have enacted additional consumer protection statutes establishing strict conditions when an annuitant sells some or all of their future payments. They require court approval to determine that the transaction is in their best interest. While the statues vary by state, these processes were designed to protect annuitants to ensure they’re receiving a fair amount for their payments.
5. Yes, the payments they receive are at a discounted rate, but these rates vary from company to company. That’s why it is important to research the company and read all the paperwork to ensure there are no hidden fees.
6. The reason these payments are discounted has to do with the future value of the money. Let’s say I offered you the choice of $100 today (present value) or $100 next year what would you do? Take the money and run because it’s worth less in the future. When buying future payments, factoring companies uses a mathematical calculation to determine how much your future payments are worth in today’s money taking into consideration inflation rates and interest rates. If you took the $100 today and invested it you would have more money in a year.
7. You also need to consider the future value as well as the diminished buying power of the money. Remember, the money is worth less in the future, while goods such as milk, eggs and gas will cost more. So you have to spend more to get the same goods but you now have less money.
8. Pensions aren’t annuities and they do not have the same requirements for the selling of these future payments. Currently, there is no court order process in place to determine if these transactions are in the best interest of the seller.
9. Pensions advances or sales, which have been under scrutiny due to the actions of some pension advancing companies, involve life contingent payments measured by the life of the pension recipient. A company will provide an advance or purchase price in exchange for the right to receive certain future life contingent payments if they come due.  The advancing company assumes all the risk and the transaction is non-recourse.  If the payments cease the pensioner owes nothing. Again, the future payments are discounted because the money is worth less in the future.
10. Individuals who are looking into these types of transactions usually do so because of an immediate financial need that cannot be address through other forms of financing. There are other factors to consider such as how much of the payments are you selling and future income requirements.
11. While it is always important to weigh all your options to determine if this transaction is right for you, it is also to important for individuals to have access to funds when they need them.

When making financial decisions, it is important to weigh all your options. Whether you’re looking to borrow money, sell a future payment or purchase an investment product you need to do your research about the products themselves as well as the companies you are working with in order to make an informed decision.

If you have any questions regarding the sale of your future payments, don’t hesitate to call CBC Settlement Funding at 877-386-3377.

CBC Settlement Funding