Who Purchases Structured Settlements
Structured settlements are financial arrangements that are commonly used in personal injury, workers’ compensation, wrongful death, and other legal settlements. These settlements involve periodic payments over time, rather than a lump sum, providing the recipient with a steady stream of income. While structured settlements are often beneficial for long-term financial security, situations may arise where the recipient needs access to a large sum of money upfront. This is where the concept of purchasing structured settlements comes into play.
When individuals or businesses choose to purchase structured settlements, they are buying the future stream of payments from someone who originally received the settlement. The purchase of these future payments can be done by investors, companies, or financial institutions, each with different reasons and objectives for entering into such transactions. This article explores who typically purchases structured settlements and the dynamics of these transactions.
1. Who Purchases Structured Settlements?
The primary buyers of structured settlements are typically institutional investors, specialized settlement buyers, and financial companies. These entities buy structured settlement payment rights from the original recipients (the sellers) in exchange for a lump sum payment.
A. Institutional Investors
Institutional investors are large financial entities, such as pension funds, insurance companies, and investment firms, that may purchase structured settlements as part of their broader investment strategy. These buyers are attracted to the predictable and stable cash flow that structured settlements offer. In essence, they are seeking to diversify their portfolios and earn a reliable return on investment by acquiring payment streams with low risk.
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Pension Funds: Pension funds, which manage the retirement savings of employees or members, may purchase structured settlements as a way to secure long-term returns. These investments provide a predictable, stable income over an extended period, aligning with the long-term obligations of pension plans.
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Insurance Companies: Sometimes insurance companies, especially those that specialize in annuities, may buy structured settlements. These companies may already be involved in issuing the original settlements and may purchase the payment rights to earn a return on their investment while continuing to provide future payments to recipients.
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Investment Firms: Large investment firms may view structured settlements as a low-risk investment that can offer steady returns. By purchasing structured settlements, these firms can build a portfolio of cash-flow-generating assets. The predictable nature of structured settlement payments is appealing for those seeking to diversify their investment strategies.
B. Structured Settlement Factoring Companies
The most common buyers of structured settlements are structured settlement factoring companies. These are businesses that specialize in purchasing future payment rights from individuals who want to sell their structured settlements. These companies offer an immediate lump sum of cash in exchange for the right to receive the future payments over time.
These factoring companies typically operate by:
- Evaluating the Structured Settlement: The factoring company will assess the terms of the structured settlement, including the payment schedule, payment amounts, and the duration of the payments.
- Offering a Lump Sum: The company will then offer the seller a lump sum payment in exchange for the right to receive those future payments. The amount offered is usually less than the total value of the future payments, as the factoring company needs to make a profit on the transaction.
- Handling the Legal Process: The transaction usually requires court approval to ensure that it is in the best interest of the seller. The court will evaluate whether the sale is fair and whether the seller fully understands the consequences of giving up their future payments.
For factoring companies, purchasing structured settlements represents an opportunity to acquire long-term cash flow at a discounted price. They make money by receiving more in future payments than they paid out in the lump sum to the seller.
C. Secondary Market Buyers
In addition to institutional investors and factoring companies, there is a secondary market for structured settlements where these payment streams are bought and sold. This market is typically less formal but can involve individuals or smaller investors who are looking to purchase the rights to structured settlement payments. These buyers may seek to profit from the predictable, long-term cash flow generated by the payments.
Secondary market buyers usually purchase structured settlements when the original seller is looking to sell a portion of their future payments or when the buyer believes they can acquire a favorable deal. The transactions in the secondary market can vary in terms of the level of due diligence and legal oversight involved.
D. Financial Advisors or Wealth Management Firms
Some wealth management firms or financial advisors may act as intermediaries to help individuals with structured settlements sell their future payments to buyers such as factoring companies or institutional investors. These professionals may assist clients in deciding whether to sell their structured settlement payments based on the individual’s financial needs or goals.
While wealth managers may not directly purchase structured settlements themselves, they are often involved in advising clients on how to navigate the process of selling their structured settlements to the right buyers. They help their clients weigh the pros and cons of selling their future payments and connect them with appropriate buyers.
2. Why Do Buyers Purchase Structured Settlements?
There are various reasons why institutional investors, companies, and individuals might decide to purchase structured settlements. Each type of buyer has different motivations, but all buyers are generally seeking an investment opportunity that offers long-term, stable cash flow. Below are the main reasons buyers purchase structured settlements.
A. Predictable and Stable Cash Flow
One of the main reasons buyers purchase structured settlements is for the steady and predictable cash flow they provide. Structured settlements typically come with fixed periodic payments that can last for several years or even decades. This predictable cash flow is appealing to institutional investors, insurance companies, and firms looking for investments that provide long-term returns.
B. Diversification
For institutional investors, buying structured settlements is a way to diversify their investment portfolios. Structured settlements offer a relatively low-risk investment opportunity compared to other more volatile assets like stocks or real estate. By purchasing structured settlements, investors can balance their portfolios with assets that generate consistent income over time.
C. Low Risk
Structured settlements are generally considered low-risk investments. This is because the payments are often backed by insurance companies and are legally guaranteed. Buyers know the exact payment schedule and amount they will receive, making this an attractive option for conservative investors seeking stable returns with minimal risk. The buyer's investment is also somewhat insulated from market volatility, which can make structured settlements a safer investment compared to more unpredictable financial markets.
D. Long-Term Investment Horizon
Buyers, especially institutional investors, are often interested in structured settlements because they align with long-term investment horizons. The steady stream of payments over many years, or even decades, fits well with the long-term liabilities of pension funds, insurance companies, or large investment firms. Structured settlements can help these buyers meet their future financial obligations without being exposed to significant risk or fluctuation.
E. Potential for Profit
When buyers purchase structured settlements, they typically do so at a discount. The buyer purchases the right to receive future payments at a price lower than the present value of those payments. Over time, the buyer will receive more money in structured settlement payments than they initially invested, which generates a profit. The amount of the discount depends on various factors, such as the length of the payment period, the payment amount, and the financial stability of the insurer backing the settlement.
3. Risks and Considerations for Buyers
While purchasing structured settlements can be a stable investment opportunity, there are several risks and factors to consider before buying them.
A. Legal and Regulatory Requirements
Purchasing structured settlements requires compliance with various legal and regulatory requirements. In most cases, a court must approve the transfer of structured settlement payments from the seller to the buyer. This process ensures that the transaction is fair and that the seller understands the consequences of selling their future payments.
B. Financial Stability of the Insurer
One of the risks buyers face when purchasing structured settlements is the financial stability of the insurer that issued the original settlement. If the insurer faces financial difficulties or bankruptcy, the buyer’s future payments could be at risk. Before purchasing a structured settlement, buyers must evaluate the insurer’s creditworthiness to ensure they can continue making payments.
C. Illiquidity
Structured settlements are long-term investments, and selling them may not always be easy. If a buyer needs to liquidate their investment quickly, they may face challenges in finding a buyer in the secondary market, and they may not be able to recover the full value of their investment.
4. Conclusion
Structured settlements are commonly purchased by institutional investors, specialized settlement buyers, and financial companies who are looking for stable, predictable cash flows. These buyers acquire the rights to future payments from individuals who need immediate cash or prefer a lump sum. The buyers are typically motivated by the desire for low-risk investments with steady, long-term returns. While purchasing structured settlements can be financially advantageous, it’s important for buyers to conduct due diligence, understand the legal processes involved, and assess any risks related to the financial stability of the insurer and the potential illiquidity of their investment.
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