An Introduction to Structured Settlements as Investment Vehicles
An Introduction to Structured Settlements as Investment Vehicles
Structured settlements are financial arrangements often used to resolve personal injury or wrongful death lawsuits, where the plaintiff receives payments over time instead of a lump sum.
While they were originally designed to ensure long-term financial stability for claimants, structured settlements have also caught the attention of investors seeking predictable, steady returns.
This post will introduce you to the concept of structured settlements, how they work, why they appeal to investors, and what to consider before investing.
Table of Contents
- What Are Structured Settlements?
- How Structured Settlements Work
- Benefits of Investing in Structured Settlements
- Risks and Considerations
- How to Invest in Structured Settlements
What Are Structured Settlements?
A structured settlement is an agreement where a plaintiff in a lawsuit agrees to receive periodic payments instead of a lump-sum settlement.
These payments are usually funded by an annuity purchased from a highly rated insurance company.
The purpose is to provide long-term financial security, particularly in cases involving injury, disability, or wrongful death.
Because the payments are often tax-free, they offer significant advantages for claimants.
How Structured Settlements Work
Once a legal case is resolved, the defendant or their insurance company funds a structured settlement by purchasing an annuity.
The annuity then pays the claimant over time, typically in monthly, quarterly, or annual installments.
The payment schedule can also include lump sums at specific dates, such as for college tuition or medical expenses.
These annuities are typically backed by top-rated insurance companies, offering a degree of security and predictability.
For investors, the opportunity arises when claimants decide they want immediate cash instead of waiting years for their payments.
By purchasing the rights to these future payments at a discounted price, investors can lock in steady cash flows with predictable yields.
Benefits of Investing in Structured Settlements
Structured settlements offer several advantages to investors:
1. **Predictable Income:** The payments are typically fixed and not subject to market volatility.
2. **Attractive Yields:** Investors can often secure higher yields compared to similarly rated fixed-income products.
3. **Reduced Market Risk:** Since these investments are not tied to the stock or bond markets, they provide useful diversification.
4. **Insurance-Backed Security:** The annuities are generally backed by established insurance companies, adding a layer of financial safety.
These benefits make structured settlements appealing to income-focused investors, such as retirees or those seeking portfolio stability.
Risks and Considerations
As with any investment, structured settlements come with risks:
- **Liquidity Risk:** Structured settlements are illiquid; once purchased, they can be hard to resell.
- **Insurance Company Risk:** If the insurer backing the annuity defaults, payments may be at risk, though state guaranty associations may provide some protection.
- **Legal Complexity:** The transfer of payment rights must comply with state and federal laws, often requiring court approval.
- **Discount Mispricing:** If not properly evaluated, an investor may overpay, reducing expected returns.
Working with experienced brokers and conducting thorough due diligence are essential for mitigating these risks.
How to Invest in Structured Settlements
Investors can purchase structured settlement payment streams through specialized brokers or platforms.
It’s crucial to evaluate the following before investing:
- The credit rating of the insurance company backing the annuity
- The discount rate applied to the purchase
- The payment schedule and duration
- The legal documentation and court approval status
Some reputable platforms include Fairfield Funding, Peachtree Financial, and J.G. Wentworth.
Structured settlements can complement a diversified income portfolio, but they’re best suited for experienced investors comfortable with the associated risks.
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