There are many ways to create an income. Investing in dividend stocks is one option, buying treasuries for the yield, or perhaps purchasing a single premium immediate annuity are others. And then there is the possibility of buying a structured settlement.
What is a structured settlement?
When a person brings a lawsuit against another, say, for example, for an injury at work that has caused a permanent physical impairment, and wins his case, the judge is likely to award the plaintiff a settlement from the defendant. This settlement is most commonly a lump sum.
Let’s imagine that you have been awarded $1 million from a lawsuit against your ex-employer for an accident at work that has left without feeling in your left arm. You could, of course, take the million bucks and have done with it.
But you could also thrash out a deal to have your award paid in installments over a period of time. It’s possible to have a smaller lump sum followed by a series of regular payments, or a deferred payment, or maybe certain special provisions, such as payment for healthcare when needed. This is called a structured settlement.
Why opt for a structured settlement?
Plaintiffs choose to have a structured settlement rather than payment in one hit for a number of reasons:
First, a source of income could be guaranteed for life.
Second, the instalments of a structured settlement could be timed to coincide with an advantageous tax position, or to reduce taxes payable on any income created by investing the lump sum.
Third, if the plaintiff is a ‘spender’ the settlement could be paid in installments to stop the plaintiff from blowing his money.
Apart from these benefits, however, structured settlements do have certain disadvantages to the plaintiff. The main one is that, although they are flexible while they are being negotiated between lawyers, once they are have been signed off by all parties they are deemed to have been carved in stone. They can’t be broken, undone, or altered in any way. And this is where the investment opportunity presents itself.
You see, very often the recipient of a structured settlement decides that he wants a lump sum rather than the periodic payments under the settlement. It may be that he wants to buy or build a new house but is unable to borrow against the structured settlement. In such a case it may be possible for the structured settlement to be sold for a lump sum.
How to buy structured settlements
If you want to create a regular income, a structured settlement may be a better option than an annuity or other investment. The terms of the settlement may be favorable, and the yield paid better than can be received on other investments. It may be that the terms of the structured settlement coincide with your tax bracket moving down. Whatever the reason for investing in a structured settlement, there are some things that you must consider. Doing so will help you to make a successful investment rather than one that causes you loss and heartache.
1) Always work with an established broker. Make sure that he has experience of structured settlements, how they work and who to buy from.
2) The broker, or you if going direct, should only deal with a structured finance settlement company that is a member of the National Structured Settlements Trade Association, and that also places settlements with private investors.
3) Get several quotes, to ensure that you get the best deal
4) Ensure you use the services of an attorney to protect your interests
This last point is particularly important. A good number of states have put in place laws that restrict the sale of structured settlements. This is because many lawmakers consider that once a structured settlement has been agreed for the benefit of the plaintiff and with the clauses that are acceptable to him, knowing that it cannot be altered in the future, then it should not be able to be sold, either: if the plaintiff wanted future flexibility, then his attorney should have advised him to accept the lump sum settlement.
On top of these restrictions, tax free structured settlements are restricted by federal law as to sale to a third party – the tax status cannot be freely transferred.
When a structured settlement is sold, it has to be assigned to the third party by the insurance companies that are paying any underlying annuities (most structured settlements are funded in this way). Many companies refuse to reassign structured settlements annuities.
If you want to purchase structured settlements, then an attorney will be able to ensure that such laws will not affect the legal status of your investments. The possibility of buying structured settlements and benefiting from their periodic payments may depend upon where you live and the terms of the underlying annuities.
If you adhere to the simple rules of buying structured settlements as outlined above, then the process of investing and benefiting from the regular periodic payments should be straightforward. As a way of creating income, structured settlements also enable you to diversify your income streams as well as benefiting from the spread of annuity providers often used to provide structured settlements payments.
The major risk is the legal risk: ensuring this is covered is the biggest step toward a successful, income producing investment.