Investing in structured payment streams for guaranteed returns
By Roccy Defrancesco
The Wealth Preservation Institute
Everyone seems to be looking for alternatives to building wealth in the stock market. Why? Because the market is risky, very volatile, and flat -- from 1998-2008, the S&P 500 index returned a negative 1.45 percent.
Investing in "fractional life settlements" has been in vogue for a few years now, even though one prominent company was recently shut down for fraud by the State of Texas. What I'm discussing in this article has nothing to do with life settlements.
I'm going to discuss a very interesting investment where your clients can earn a guaranteed rate of return of between 5.5 percent and 7.5 percent, and where advisors can earn 5.5 percent to 7.5 percent on deals.
What are structured settlements?
The term "structured settlement" refers to a structured payment stream. What kind of payment stream? A payment stream paid to a tort victim, someone whose been harmed, who won a negligence lawsuit, and who receives a settlement for damages through a payment stream for a period of five- to 10- to 20-years from the defendant.
Another type of payment stream is one paid to a lottery winner. In most states, lottery winners can take a lump sum of a lesser amount or a payment stream for a period of years.
Managing investment risk
In this day and age, when the stock market is considered "risky" by many people and conservative investors are not very happy with the low rate of return on their government bonds and fixed annuities, the question is: "Where can clients put their money that is extremely safe and at the same time yields a high rate of return (at least double what you could get with the same low level of risk)? The answer for this article is by purchasing guaranteed annuity payments at a discount.
"Discounted" payment streams
The only way for someone to receive cash now in exchange for their structured payment stream that is supposed to pay over a multi-year period is to discount the future payment stream to a present-day value and sell it. As you can imagine, for many different reasons, people who are receiving structured payments would rather have cash now.
Have you heard of JG Wentworth? One of their ads goes something like, "It's my money and I want it now!" These ads ask people who have lottery payments and structured settlement payments if they want to sell their cash flow streams for cash now.
Guaranteed rate of return
Because of the present-day value discount involved, the cash invested by a purchaser typically generates a guaranteed rate of return between 5.5 percent and 7.5 percent (effective interest rate) -- about twice what one could get using similar parameters with very low risk.
How big is the market?
The United States is the most litigious country in the world (94 percent of all lawsuits are instituted here). There are about $6 billion per year in legal settlements for personal injury (or wrongful death) claims. About $2 billion of these settlements are sold each year to investors at a discount of approximately 50 percent of what they were originally purchased for.
Easy to get into; tough to get out of
I used to be a personal injury lawyer; and, therefore, I can state from experience that a good percentage of personal injury lawsuits are settled and paid through a structured settlement, rather than in a lump sum.
It sounds great to the injured party when they know they will receive a guaranteed payment stream (insured through an annuity issued by an insurance company) for 10-20-30 years. However, the downside to a structured settlement is the lack of liquidity. If the injured parties need cash, they cannot dip into a structured settlement to receive more money. They are stuck with the setup-payment schedule.
As you can imagine, once investors started offering to pay cash for these structured payment streams, many injured parties jumped at the chance to get their hands on a pile of cash rather than being stuck with their structured payment stream (even if it's a discounted pile of cash).
In my opinion, selling is not a good thing for the injured party, but in the context of an investment for the purchaser, it's an opportunity too good to pass up.
The process to buy/sell a structured payment stream
In order to make the future sale or transfer (for estate and/or gifting purposes) of the payments easilyy and without any delays, these transactions are serviced and processed through a third party -- a large, well-capitalized title company. Doing so prevents delays and helps protect all parties from fraud.
Who is a good candidate to invest in structured settlements?
The answer is pretty simple: any investor who considers themselves conservative but who would like to earn a "guaranteed" investment return of 5.5 percent to 7.5 percent over a period of five to 20 years.
How much can advisors make selling structured settlements?
Ironically, the amount of money advisors can make by brokering a structure settlement is very similar to an FIA sale. Advisors can earn between 6 percent and 8 percent of the purchase price.
Should you learn more about helping clients purchase structured settlements to diversify their portfolios? You should if you have clients who like the idea of receiving a guaranteed income stream that will equate to a return on their investment of 5.5 percent to 7.5 percent.
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