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.
For as long as I can remember people have hated the industry I worked in—structured settlement factoring; terms such as white hat and black hat were often used. Financial professionals as well as some consumers have often compared us to the modern day equivalent of snake oil salespersons because we buy future payments. They imply that we’re doing something wrong for providing liquidity to assets that annuitants can’t use as collateral.
Lawyers and legal settlement planners with their crystal balls create settlements for individuals, planning out their future financial needs. At settlement or during a mediation they do what is believed to be best for the plaintiff and potential structured settlement recipient, but, in reality, we can’t foresee the future and the only certainty in life is death and taxes. People lose jobs, get divorced, owe taxes and suffer from illness without notice. Life changes and so do people’s financial situations. That’s why structured settlement factoring exists.
Financial pressure can be enormous. Sometimes people are desperate enough to do anything to get out of their situation and will make hasty decisions. Other times they just know what they need. They have weighed the options, done the math and selling some of the future payments makes sense. They don’t have to sell all the rights to their future payments, just enough to get what they need to help themselves out of a tough situation.
In every industry there are a few individuals or companies with questionable ethics. There are also companies where integrity and ethics prevail. These companies offer competitive pricing and look out for their clients’ best interest. Their rates are consistently lower than most credit cards, cash advances and payday loans. Also since selling future payments isn’t a loan they annuitant isn’t creating additional debt.
One huge misconception is that all factoring companies pay only a small fraction of what the payments are worth. That is to say, the present value of a future payment today will be less than the principal amount when it comes to maturity.
Here’s an example that will help you understand. Let’s say Jane is offered the choice of $100 today (present value) or $100 next year what should she do? Take the money now because it is worth more now than in the future. When buying structured settlement annuity payments, a factoring company uses a mathematical calculation to figure out how much your future payments are worth in today's money taking into account inflation rates and interest rates. In addition, if Jane took the $100 today and invested it she would have more money in a year.
Many detractors want you to believe that the annuitant would receive a microscopic amount compared holding onto the annuity. They fail to consider the future value as well as the diminished buying power of the money. Seriously folks do you think the factoring industry would still be around if people were being swindled out of their money? Forty-six US States and the Federal Government have enacted consumer protection statutes to make sure these transactions are in the best interest of the seller. If New York State is an indicator, contracts with ridiculous rates will not be approved.
Selling future periodic payments isn’t something that should be done in haste. By researching the companies before you call them you can avoid the hassles of dealing with companies with bad reputations. If there are no complaints with the Better Business Bureau AND your state attorney general’s office, call for more information. Don’t be afraid to look on the Internet to see if others are complaining on websites like Rip off Report.
Make sure you get a few quotes before you sign on and get everything in writing. Don’t just take the company’s word for it, read everything they give you. Beware of hidden fees, bait and switch offers or salespeople trying to pressure you into signing. If you don’t understand what you’re reading have a trusted advisor review it. In a dog eat dog world of finance, don’t be caught wearing milk-bone underwear—look at for you and your best interest.
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.
When a potential client contacts us regarding selling their structured settlement annuity for a cash lump sum two questions always seem be asked. Why does it have to be approved by a judge and do I need to appear?
The reason selling your future payments requires court approval is to protect your best interest. Since you have to look out for number one, wouldn’t it make sense that you would want to be there to explain why you need the money to the judge?
Before 1970, when a lawsuit was settled the injured party would receive a cash lump sum. Then there was a case in Canada and Europe that resulted in many catastrophically injured people. These individuals needed their settlements to last throughout their lifetime. For over 20 years, the federal government has been encouraging the use of structured settlements. Originally used to pay out large settlements in tragic cases, they are now being used to fund cases as small as $5,000.
In 1982, a bipartisan coalition of legislators in Congress came together to pass legislation that amended the federal tax code by enacting The Periodic Payment Settlement Act of 1982 (Public Law 97-473). This act specifies tax rules to encourage the use of structured settlements to resolve physical injury cases. Section 104(a)(2) of the Internal Revenue Code offers tax advantages to the plaintiff by guaranteeing that the full amount of the structured settlement payments is tax-free to the victim. On the contrary, the investment earnings on a lump sum payment are usually fully taxable.
In order to protect the rights of the annuitant, forty-six states and the federal government have enacted additional consumer protection statutes that establish strict conditions when an annuitant sells some or all of their future payments. Under the federal law, court oversight and approval is required for individuals who chose to sell payments from a structured settlement to a third-party company. The details of the statues vary by state but the courts approval is necessary to protect the annuitant and to ensure that the annuitant is receiving a fair amount for their payments.