If you’ve made investments in the past or you currently hold a portfolio of stock, bonds, mutual funds, and so on, you are probably no stranger to the cold calls from brokers informing you of great investment opportunities. And the latest call to action seems to include funneling money into structured settlements. While most people are aware that these settlements occur in lawsuits where the claimant is awarded a monetary payoff that is structured so as to be doled out incrementally (annually or at specified intervals) rather than as a lump sum, you might not know exactly how this equates to a chance for you to invest. The long and short of it is that investment groups purchase these settlement by paying a lump sum to the claimant (less than the total value of the settlement), who then signs over the structured payments. You will then buy in for the promise of payments down the line (as the annuities “mature”, so to speak). It sounds simple enough, but is there more to it? And is it a wise investment?
There are a few things you need to know before you decide to invest in structured settlements. They may seem attractive because of the high returns that are promised (generally in the 4-8% range over the life of the investment), but there are all kinds of rules and restrictions associated with this type of investing that make it less appealing. For example, structured settlements are all different. Some pay out annually for several years while others pay set sums at specific intervals. One might pay $12,000 each year for 20 years, one could provide $100,000 the first year, another $100,000 five years later, and an additional $50,000 ten years down the line, or you could end up with one that would have paid out equal amounts at the claimant’s 18th, 21st, 25th, and 30th birthdays. You really never know what you’re getting and your take depends largely on the terms of the settlement (or settlements) you buy in on.
Of course, the nice thing about such investments is that they are considered relatively low on risk since the payments nearly always come from an insurance company. Although the parties technically responsible for paying out a settlement are the individuals or companies found at fault in a lawsuit, more often than not the burden of payment actually falls to their insurance provider. In truth, it is extremely unlikely that an investment group would purchase them otherwise. And with the backing of an insurance company you can be almost certain that the payments will come through; even if the insurer were to go out of business there would have to be contingencies in place to pay off current claims. So in that regard it is a rather attractive proposal.
On the other hand, there are equally appealing options that are far less complicated than dealing with structured settlement annuity investments. Bonds, for example, may show similar yields and they are also a long-term investment, but you won’t have to worry about wacky schedules for repayment (that could have a dramatic effect on your tax returns during certain years, eating into your profits). And some structured settlements also have tax-exempt status, which makes them even more complex. In short, this type of investment does stand to show some return over time, but the hassles associated with making a smart investment may make the prospect more trouble than it’s worth.