Structured Settlement Transfers

Discussion in 'Stock Market' started by Skull Pilot, May 24, 2010.

  1. Skull Pilot
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    Skull Pilot Platinum Member

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    Is a guarantee a bad thing?

    When I was in the financial adviser biz years ago my pat answer to that question was "A guaranteed return is a guaranteed loss because if someone is guaranteeing you a 7% return, you know they're getting more than 7%"

    But today, I'm not so sure if a guarantee is such a bad thing. Maybe it's because I'm a little older and predictability in my finances makes it easier to plan my future.

    I have recently been looking into structured settlement transfers as part of my overall strategy. You may have seen the commercials like "I have an annuity but I need cash now". Well an annuity or a pay out over time is a structured settlement. Now in general structured settlements are a guaranteed financial product but some people are willing to give up a portion of their future payments to receive a lump sum payout of their structured settlement or annuity.

    Until now these settlement transfers were not readily available to the general public and a guarantee of 6-9% interest in today's market is pretty good when money market and CDs, the traditional safe havens, are paying out 1% or less in some cases a 6-9% return looks very attractive indeed.

    You can access these though financial advisory firms and the process is really quite simple. You receive a list of available transfers with investments ranging from 20K to 150K or more with varying time frames. Generally the longer the time frame the higher the initial investment and the higher the interest rate.

    I was looking at a list and as an example I'll use one offered by the MA state lottery.

    An investment of a little over 140K and a 10 year time frame will guarantee a pay out of 50K a year for 6 years. Or a guarantee of about 7.5%

    There are some settlements for as little as a 40K investment with a much shorter time frame.

    I haven't committed to one of these yet but I am pretty sure these settlement transfers will be a part of my overall plan.

    Thoughts?
     
    Last edited: May 24, 2010
  2. Granny
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    Granny Gold Member

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    I guess I'm too cynical to trust those payouts to people who "want their money and need it NOW!" You know the companies/entities are going to be making a fine profit off those transactions. I just get the feeling those ads pander to people who don't have all that much financial savvy.

    It seems the up front taxation on a lump sum settlement would be horrendous, but less eye-popping on the smaller increments. Depending on the source of "settlement payments," people are not going to get the full award amount anyway. Why give up more of the settlement funds to yet another transaction.

    I don't know - I guess there was a time when more people were honest and trustworthy than they are today. It's become a "What's in it for me?" and "How can I get more?" society.
     
  3. Skull Pilot
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    Skull Pilot Platinum Member

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    The money was already guaranteed to be paid out when the annuity was bought years ago or when the settlement was deemed to be paid out. So the companies committed to pay are not paying out more or less than they already would have.

    The return that you receive is what the current owner is giving up for a cash payout now.

    Many of these are offered by A or better rated companies. The settlement transfers have to pass legal muster before they are approved for sale as well.

    And taxes can be deferred on these payouts if they are part of a retirement plan. But taxes are going to happen no matter what aren't they?
     
  4. Madeline
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    Madeline BANNED

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    If you buy from a financial depository that has no insurance, or none on the product you are purchasing, the risk of default if borne entirely by you. Annuities from insurance companies typically haircut your initial deposit by 25% -- some claim they return the funds to you over time, but in reality, all they are doing is returning a small fraction because money has a time value.

    I would never buy such a product unless I at least knew how my salesman was being compensated and at what rate, and I also knew what my cash value/surrender value would be at every stage.

    Even then, bear in mind an annuity is a similar to a bond -- however much the rate of return on your product may be tied to the performance of a stock index, etc. you have invested the entire amount in a single company, the insurer who sold the product, not the indexed funds themselves.

    I don't really like such investments, as I guess you can tell. I feel pretty strongly that diversification and financial guarantees are better touchstones for the investment strategies of most older adults.
     
  5. Skull Pilot
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    Skull Pilot Platinum Member

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    It's not buying an annuity.

    You are paying someone a reduced rate on money they are guaranteed to be paid in the future.

    It is not the same as buying and funding an annuity. The annuity has already been bought and funded.
     
  6. Madeline
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    Madeline BANNED

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    Any promise to pay sold by a commercial vendor must be sold by a financial depository -- and all carry a risk of default. Some are backed by guarantors and/or gurantee funds. Others are not. Even a bond from a corporation or municipality is a promise to pay money in the future, and to that extent, the sellers are financial depositories where the buyers are concerned. Only a seller of a promise to pay in the future which has the ability to pay as the obligations ripen will do so; and only those which are also willing to pay will do so. The financial strength of a seller is therefore relevant and will remain so throughout the life of the contract/promise.

    If this is not a responsive reply then perchance I failed to understand the Op, Skull Pilot.
     
  7. Skull Pilot
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    Skull Pilot Platinum Member

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    Which is why only A rated companies are the ones to deal with.

    There is not a lot of defaulting going on in the annuity biz even now. And As I said these are annuities, in most cases, that are already in the pay out phase.

    For example a private party has an annuity with 5 years left to pay out 70K. I pay him a little over 50K and in 5 years get the money he would have been paid as a lump sum.

    I do not see an investment of a little over 50K that in 5 years will pay me 70K (6.5%) as a particularly risky venture.

    If you want to compare risk, these are some of the least risky products out there.
     
  8. Madeline
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    Madeline BANNED

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    Private persons can buy the annuity rights of others? How? these policies are not assignable, as best I know.
     
  9. editec
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    editec Mr. Forgot-it-All

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    One way or the other every investment is a bet on future potential.

    If your bet that the interest rates will fall, then a fixed rate structured annuity is a good investment.

    If your bet is that interest rates (which are really describing the loss in purchasing power of money over time) are rising, then locking into a rate of return that is static is a bad investment.

    But there's one other factor that you need to take into consideration...the solvency and credibility of the organization which will be paying you those annuities.

    Take AIG for example.

    They no doubt offered fix rate annuities products.

    Assume you'd purchased one.

    Now also assume that the "let 'em bleed" types, the types screaming about the bail out had had their way.

    Your investment would have been completely worthless.

    There is no truly safe harbor in a capitalistic system.

    Oh one might exist today, but it could easily change as conditions change, so really they are only safe TODAY.

    There are good choices, and bad ones, but knowing which is which -- and for how long! -- is really a crapshoot.

    Life is risk.

    You makes your bets and you watch the race.
     
  10. Skull Pilot
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    Skull Pilot Platinum Member

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    True, Ed.

    Which is why one should diversify. Lord knows I am not a risk aversive investor but as an overall strategy some guaranteed growth albeit with some risk, although one can argue a slightly more managed risk, certainly has its appeal as part of an overall strategy.
     

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