by John Darer® CLU ChFC MSSC RSP CLTC
Structured settlements offer many valuable benefits to tort victims. But too much of any "good thing" isn't necessarily a good thing.
The purpose of this post is to make structured settlement consultants, attorneys , judges and tort victims aware of why there is a need for a comprehensive plan of distribution of settlement proceeds that follows a fact finding process.
There's no excuse for a structured settlement recipient having to sell structured settlement payment rights within months of the structured settlement being created.
I would like to make structured settlement brokers, settlement consultants, settlement planners and those that manage them aware of the cost of what could be considered "too much of a good thing"
Taking the example of a person receiving structured settlement payments from an annuity set up 2 months ago. She briefly met with someone introduced to her by her attorney who said he was a "settlement planning consultant". She is to receive monthly payments of $10,000.00 for 240 months (20 years) certain. Before she has even received the annuity contract she realizes that the amount of up-front cash is not sufficient to take care of her immediate needs. She needs $160,000 to cover her shortfall. All parties have however, executed a release and funds have changed hands. She contacts her attorney and is told that it is too late. She sees an ad on the Internet and spontaneously calls the toll-free number.
The factoring company tells her that they can give her "cash now" in the amount of $160,813.00 within 60-90 days, but she will have to give up the rights to $1,600 per month (16%) of her $10,000.00 per month structured settlement payments for 20 years.
She is told that this equates to an approximate discount rate of 11%. Initially that seemed fair to her taking into consideration the prevailing credit card rates. (Last year a lawyer for one of the cash now pushers, Robert Ostrov, was recorded using that absurd justification as part of a module of the Registered Settlement Planner course).
But is that really all there is to it?
The cost of $1,600 per month of structured settlement payments from the A.M. Best rated "A+" company that issues the structured annuity (two months ago) was $252,162.00 Now she's getting an offer of $160,813.00 two months later, That's a 36.23% reduction in principal in 2 months!
She's confused, both her attorney AND the settlement consultant who was referred by her attorney said this was "a conservative investment". Last September she lost 30% on her 401(k) that was invested in stock mutual funds. "How could this be worse?" she thought…
HOW COULD THIS BE WORSE? THAT IS THE QUESTION!
Now I don't want my friend, The Factoring Channel's Matt Bracy, to get upon his soap box and try to justify the cost of money as he has often done in the past with erudite precision. Don't fall off your chair but in this case I'm not attacking the factoring companies. That is not the point here. The factoring company is simply valuing the future periodic payments using a formula so it can make a profit. In this case I'm looking at what did she invest and what is she getting back ("in 60-90 days" if a court approves)
The point is that it appears that the "brief encounter" has proved to be as risky as any other type of "brief encounter". In a financial case of "ain't that the truth", you need to get to know someone before you "get in bed" with them. Had there been a greater knowledge of the woman's needs perhaps there would have been more allocated to cash from this good size settlement (hell, $400,000 already was!)
Settlement planners, whether registered settlement planners or those that loosely use the term "settlement planner" or "fiduciary" (in holding themselves out as such) have the responsibility to do a sufficient level of fact finding before making recommendations that could end up as financial devastating as the above example. Attorneys representing tort victims share this responsibility, in my opinion, particularly if they are simply bringing in an adviser otherwise highly qualified, only ask for an annuity quote and fail to address the client's liquidity needs. A structured settlement broker or settlement consultant who takes the random plaintiff case must also recognize a level of responsibility. Would a tort victim be able to recover damages against the attorney, guardian ad litem, settlement planner or structured settlement broker under the above scenario, if the right questions were not asked. the answers digested and appropriate recommendations made? Consider that the structured settlement broker would have made or shared a $3,500 fee on the amount that the tort victim lost (at the time the structure was created).
Structured settlement factoring transactions carry a high cost of money. It is generally NOT a good idea to sell your structured settlement payment rights until you have explored and exhausted all other options.
There is a huge range in discount rates with a concomitant effect on how much you can raise for sold payments. Remember if you are really stuck and must sell, you want to sell as little of your structured settlement payment rights as possible to solve your unexpected financial problem or accomplish your goal so that there is as little disruption as possible in your long term financial security.
Use the free structured settlement factoring discount rate calculator to assist you in evaluating the true cost of the potential decisions you are contemplating. Determine the cost of the payments you're thinking about selling and compare that to what you are being offered.
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