Structured Settlement Surveys: Are they statistically relevant?
Last week J.G. Wentworth released a press release stating that only 6.6% of structured settlement recipients sell their future payments and that those who do sell commonly cite getting out of debt, purchasing a home or vehicle, unexpected medical bills or continuing their education as reasons for selling. [i]
The press release stated that the study was based upon data collected by J.G. Wentworth over the past 20 years but it did not provide any further details regarding the data collection. For instance, how did they obtain the data; how many people were included in the study and did it include data from other factoring companies besides J.G. Wentworth/PeachTree? In addition, there was no mention as to whether discount rate played a considerable role in the annuitants’ decision to sell.
Back in 2008, J.G. Wentworth published an email survey of 115 respondents who previously sold some or all of the payments to J.G. Wentworth in exchange for a lump sum payment. In this survey, only 18% said they were completely satisfied with their structured settlement. 31% said they didn’t wish that there attorney negotiated a single lump sum payment which means that many of them would have liked a lump sum payment. 60% of the respondents sold their payments to pay bills while less than 5% did so in order to buy a house. 30% stated that they would not sell their payments again. J.G. Wentworth only released 9 questions to an industry blogger and did not reveal the remaining questions, the number of individuals the survey was sent to or any other circumstances that could have skewed the results of the survey.[ii]
In the 2006 The National Structured Settlement Trade Association (NSSTA) survey of attorneys involved in structured settlements (43 telephone surveys) and structured settlement recipients (1275 telephone and Internet surveys) 75% of annuitants were happy with their structured settlement and would recommend one. [iii]
In an AIG survey of 1,000 participants, 65% of respondents said they would elect a lump sum payment, while 26% stated that a lump sum was more appropriate to pay bills.[iv]
So if that many people wanted a lump sum payment then why aren’t they selling? In a review of 100 recent factoring transactions it was revealed that the average discount rate was 13.75% with 7.5% being the lowest and 20% being the highest. So you have to question whether the 93.4% of individuals that chose not to sell would have changed their mind IF the discount rate was closer to the 7.5% rate.
As structured settlement annuity premiums continue to decline (10% from 2010 and 20% from 2008)[v], there will be fewer annuitants available to market. While it seems perfectly logical that this would in fact lower the discount rate, if one looks at current trends it mostly will not occur.
For example, the top three companies spend millions of dollars a year in order to entice annuitants to sell. They’re all well established and are household names. Smaller, lesser known companies cannot afford to go head to head in advertising spends with these industry giants so they tend to focus on non-traditional marketings. While some sellers will seek out these smaller players in order to obtain better rates more often than not a first time seller will call one or two companies they see on TV. Which basically means they are going to receive rates of 13% or higher.
While the decline in annuities does not currently seem to be an issue for J.G. Worthworth/Peachtree who already completed a $244 Million Securitization this year[vi], one has to wonder whether primary market decline and increased competition combined with well informed, tech savvy consumers could adversely affect their business in years to come.
J.G. Wentworth had securitizations worth $469,000,000 in 2011 and $579,000,000 in 2010.[vii] This represents 9.4% and 10% of the annual premiums for those years.
[i]http://www.businesswire.com/news/home/20120601005102/en/Structured-Settlement-Retention-Rates-93.4-Study-Finds
[ii]http://s2kmblog.typepad.com/rethinking_structured_set/2011/10/structured-settlement-metrics-5.html
[iii]http://s2kmblog.typepad.com/rethinking_structured_set/2011/10/structured-settlement-metrics-5.html
[iv]http://s2kmblog.typepad.com/rethinking_structured_set/2011/10/structured-settlement-metrics-5.html
[v]http://s2kmblog.typepad.com/rethinking_structured_set/2012/02/structured-settlement-sales-decline.html
1,500 ELNY short fall victims under pressure to accept payment cuts rather than appeal
When an injured party is the recipient of a court-awarded compensation it is often encouraged by everyone involved for the party to receive their settlement in the form of periodic payments through a tax-free income stream. The intention is to ensure that the injured party does not prematurely exhaust their settlement funds and have guaranteed income for a specific time period. [2]
As previously reported, Nassau County Supreme Court Justice John Galasso approved a plan to liquidate Executive Life Insurance Company of New York (ELNY) resulting in major losses in benefits for many personal injury victims. [2]
Obviously this causes a great financial burden to those victims who rely on the money in order to support themselves as well as their families. As you can imagine there are many people who disagree with the outcome, specifically the 1,500 annuitants who will be receiving cuts in their payments as a result of the approved liquidation. In some cases these cuts are more than 50%. [1]
According to structured settlement industry expert, Patrick Hindert, the life insurance industry is voluntarily establishing a $100 million “Hardship Fund” to assist those people who are affected the most by the liquidation. This amount only represents 10% of the actual shortfall. [3]
Hindert, quoting several passages from documents sent to shortfall victims, has implied that any appeal and subsequent rejection of Judge Galasso’s order will cancel the conditions for establishing the fund. As a result no payments will be made available to the shortfall victims. [3]
Many individuals are worried by the perceived attempt to strong arm annuitants into accepting the deal rather than appealing the terms of liquidation order. [3]
Speaking for the ELNY structured settlement shortfall victims he represents, attorney Edward Stone states, "These statements represent another strong arm tactic to try to prevent ELNY shortfall victims from pursuing their constitutional rights." [3]
Some victims who chose to remain anonymous believed it would have been more fair if the loss would have been distributed equally among all annuitants rather than single out the 1,500.[3]
One industry expert had a different take stating, “Annuitants received 100% of what was a grossly unreasonable annuity amount.” [5] Implying incompetent regulators who allowed the sales to happen, the poor pricing of annuities as well as the annuitants’ willingness to put all their “eggs in one basket” were part of the reason ELNY failed while others prevailed. [5] This individual suggests that ELNY victims, many of whom were minors at the time, should examine all the facts around their cases, sales literature, correspondence and financial comparison to determine if their parents, lawyers etc were at fault for buying the ELNY annuities in the first place. [5]
Since the 1970’s, life insurers have paid benefits worth approximately $100 billion, according to industry experts.[1] Structured Settlement annuities have been a major source of profits for many life insurance companies including some that are currently experiencing losses. [4] Therefore it comes as a shock to discover that the insurance companies aren’t willing to do more to help the victims.
If annuitants can no longer believe the guarantees stated by insurers, the perceived value of annuities, as a whole, will greatly diminish ultimately decreasing the demand for such products. While the ELNY case may be the only such case of an insured not being able to pay its annuitants, we do not know if it will be the last time this will happen. We do know that any perceived instability by insurers, whether real or imagined, could adversely affect the reputation of an industry that markets itself as a “safer” investment.
Regardless for the reason for ELNY’s demise there needs to be something in place to protect the rights of all annuitants ensuring that their guarantees are honored. Perhaps there is a need for additional legislation, perhaps the system as a whole needs to be re-examined.
1. http://online.wsj.com/article/SB10001424052702304299304577348342869349010.html
2. http://rescuecapital.com/blogs/2012/04/a-bad-day-for-structured-settlement-annuitants/
3. http://s2kmblog.typepad.com/rethinking_structured_set/2012/05/elny-hardship-fund.html
4. http://rescuecapital.com/blogs/2012/04/metlife-first-quarter-2012-losses/
5. http://structuredsettlements.typepad.com/structured_settlements_4r/2012/05/with-all-due-respect-to-elny-victims.html
Two former insurance agents receive jail time for swindling elderly clients
New York regulators have announced that former insurance agents Cynthia Gibbons aka Cynthia Bulinski, 48, and Kellie Will, 47 were sentenced to jail time and restitution for swindling $400,000 from elderly clients.
The agents, who had scams in place to steal approximately $2.4 million, fraudulently changed beneficiary information on annuity contracts.
According to investigators, the pair admitted that Gibbons, an investment advisor, sold annuities and then changed beneficiary information to Will who received payouts when the clients died. Gibbons and Will would than split the proceeds. Gibbons also received commissions on the sales.
A funeral director notified authorities because he was suspicious of a death certificate request by the pair for one of Gibbons’ clients. The pair wanted the certificate so Will could make a claim as the beneficiary of the annuity. The investigation ultimately led to their arrest.
Gibbons was employed at a Key Bank for 10 years before becoming an independent broker/dealer with J.W. Cole Financial. Previously, she was also associated with Cadaret Grant, another investment advisory firm. Her licensed was revoked in December.
Will was a Key Bank employee and her license expired in 1997.
What to do if you come into money
Did you know that 9-10 lottery winners are broke within 5 years? It’s not surprising since most people are ill-equipped to handle the windfall of instant money. While structured settlement annuitants and lottery winners who opt for the annuity have better protection against unwise spending, bad investments, con-men and trustee mismanagement there are some safe guards that should be taken if you ever come into money.
Former dot-com millionaires, financial gurus and lottery experts have a great amount of advice on how to preserve your money including:
- Shhh, don’t say a word: Don’t update your Facebook status and call everyone you know telling them the good news. There was one case of a gentleman who bragged about receiving a legal settlement only to have his house robbed. You will have enough strangers, long lost family members and charities coming out of the woodwork soon enough so try to keep it a secret.
- Don’t change your lifestyle: One expert suggest that you do not change anything about your lifestyle for 1 year. I know that seems really tough to do especially if you’re living on your buddy’s couch but let the money sink in and don’t make foolish purchases.
- Get help: Hire a lawyer, accountant/tax expert and financial planner to help you make decisions regarding the money. Make sure you get a least 3 names and they are a member of the following organizations--National Association of Personal Financial Advisors, the Financial Planning Association, and the Certified Financial Planner Board of Standards. The American Institute of Certified Public Accountants has a list of CPAs who've earned the Personal Financial Specialist designation. The Securities and Exchange Commission (SEC) also has an area on their site to check financial firms and planners.
- Tax time: Depending on where you live, where you got the money from (lottery versus lawsuit) and how you’re receiving the payments there will be host of tax issues to consider. Get with a tax expert to discuss all of the implications before you do anything with the money. Don’t be like those few “celebrities” that didn’t pay their taxes and ended up in jail.
- No friends: Don’t lend money to old friends and don’t make new friends. Stay away from people in general because they will want to borrow from you or have an investment for you. Many times these new friends are scammers.
- No investing: Sit on your money and do not make any investments like buying artwork, businesses or stocks. Again see rule number 2.
- The 2% rule: If you can’t resist a major deal do not put more than 2% of your money into it. This way if this great deal doesn’t pan out you’re preserving your wealth.
- Watch your spending: If and when you make a few purchases keep it reasonable. Don’t buy a million dollar mansion or brand new cars for the entire family. Know where all your money goes, any fees associated with your purchases and other costs.
- Protect your identity: If it is possible protect your identity. Change your phone number, avoid appearing in articles and don’t make public donations. If you can, form a trust instead of using your name and always keep a watchful eye on your credit report.
- Stay healthy: Stress can kill you and no matter how much money you have it means nothing if you don’t have your health.
Sources:
http://www.foxnews.com/us/2012/03/29/mega-millions-what-to-do-when-win/
http://money.usnews.com/money/retirement/articles/2008/10/01/how-to-find-a-financial-planner
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