Guide to Purchasing a Structured Settlement

Purchasing a structured settlement can be profitable for some investors and can be a win-win situation for both the buyer and seller. It solves a problem for an individual who needs a lump sum payment. It can also provide an attractive stream of income for an investor. As with any investment opportunity, there are pitfalls. The old adage "let the buyer beware" applies. However, there are some basic steps you can take to protect your interest and to help you avoid potential problems.

What is a Structured Settlement?

Structured settlements typically occur when an individual receives a large award in a personal injury suit. Instead of awarding a lump sum payment the award is structured in a series of payments, over an extended period of time. In most cases, a company does not want to carry the liability of the payments on its books. Most companies would rather show the liability only once during one accounting period on its financial statement. Therefore, the liability of the award is usually backed by an annuity from a third party.

Annuity is a contract issued by insurance companies. In exchange for a lump sum payment, the insurance company guarantees the agreed upon payments for the life of the person receiving the payments. The insurance company employs actuaries to compute the amount of the lump sum. The actuary will base the life expectancy used in the contract on a number of factors, including the age and sex of the person. If the person lives longer than the assumed life expectancy used in the contract, the insurance company bears the financial risks. If the person lives a much shorter life span, the insurance company reaps the financial gain. Therefore, a company is able to remove the liability from its books with one payment.

Buying a Structured Settlement

Individuals receiving a structured settlement may have a need for a lump sum, instead of a series of payment. Therefore, they can elect to sell the payments for a lump sum. There are companies that can make arrangements to facilitate transactions between sellers and investors who are interested in purchasing their settlements. The seller receives a lump sum while the buyer receives the series of payment. Therefore, this arrangement can be financially rewarding for both buyer and seller.

Important Considerations

There are a myriad of legal issues to consider when buying a structured settlement. Most individual lack the expertise and skills needed to address all of the issues and to perform the necessary due diligence. Therefore, it is unwise to navigate this venture alone. Enlist the help of professionals. Consider employing the services of a reputable broker. Check the background of the broker and the company you have selected. Also, be sure to review more than one company and obtain multiple quotes for comparison. You should also consider hiring a competent attorney that specializes in this area. Finally, do your own research and educate yourself as much as possible to ensure that your decisions are made with your best interests in mind.

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