Structured Settlements - Have Your Cake and Eat it Too

Is there really such a thing as a good problem? Some might say so. My aunt comes to mind. Back in the 1980s she won two million dollars in the lottery. How could that be any kind of problem you ask. Well, when the lottery people asked her if she wanted the money all at once or in monthly payments over 20 years, she took the payments, and regretted it right up until she got the last one.

I don't know exactly how much she got every month but she claimed it wasn't enough to live on so she had to keep her job. In hindsight, what she would have rather done was take the lump sum, which would have been less than the whole two million, and invested it. That way, by wisely placing part or all of the money in a high-yield investment, she could have had monthly income that far exceeded what the lottery folks were paying each month. So much for hindsight.

What she ended up learning, though it was too late to be of any use, is that she could have sold her winnings and received a lump sum of cash. How does this work? Well, there are companies and investors who are willing to buy income streams or payments. Monthly lottery payments qualify for this as do private mortgage note payments, annuity payments, structured settlements, royalties and several other types of steady payment streams. What happens is, based on the type of payments one might be receiving, an investor or company dealing in purchasing such assets will examine the type of payment a person is getting and make them an offer on the remaining payments.

Just like any state lottery commission, investors don't pay the full face value for these payments. Sometimes the reasons may not seem logical but the simple answer is, a lump sum today, even when discounted, is more valuable than the promise of a stream of future payments. I'm reminded of the old saying, "a bird in the hand..."

But many of the companies offering such a service are quite creative. They are able to offer more than one way to receive money up front and at the same time, still leave the seller with some of their payments. There are arrangements where such a company would pay cash up front in exchange for a portion of the payment. It might work like this: Sally is receiving payments of $600 monthly for 10 years on an accident settlement. She wants cash today. In exchange for a cash payment now, she evenly splits her monthly payment with an investor. So, she gets a lump sum of cash today and continues to receive $300 for the next ten years.

Another possibility would be that someone holding an annuity or receiving payments on a private mortgage note might assign his or her rights to receive, say, the next five years of payments in exchange for a lump sum today. After the five years has passed, the individual would revert to collecting his monthly payments.

There are many ways to structure such transactions depending on the needs of both the asset holder and the asset investor. Often the asset holder can have the best of both worlds. That is, they get to receive a lump sum up front while preserving the right to resume collecting payments in the future or receiving partial payments for the remainder of the term - like having your cake and eating it too.

By Jared Emin