Payout for Structured Settlements - that big of market??

[5que]

Being home on medical leave, I’ve been enjoying some guilty daytime TV pleasures which usually involve throwing of chairs and serious lack of knowledge of birth control methods. But I’ve been noting a lot of commercials for companies (like JJ Wentworth) that are offering cash for structured settlements.

Are there that many people with structured settlements out there? JJ Wentworth isn’t the only company that has these ads on TV. I just can’t imagine there are enough people out there willing to sell their settlements for this to be a profitable business. But I guess it must be. Anyone have any insight into this business?

[drachillix]

@5que

Being home on medical leave, I’ve been enjoying some guilty daytime TV pleasures which usually involve throwing of chairs and serious lack of knowledge of birth control methods. But I’ve been noting a lot of commercials for companies (like JJ Wentworth) that are offering cash for structured settlements.

Are there that many people with structured settlements out there? JJ Wentworth isn’t the only company that has these ads on TV. I just can’t imagine there are enough people out there willing to sell their settlements for this to be a profitable business. But I guess it must be. Anyone have any insight into this business?

Child support might be considered a structured settlement…there plenty of that.

[raindog]

@drachillix

Child support might be considered a structured settlement…there plenty of that.

Huh? :dubious:

[DrDeth]

It’s mainly Annuties, and of those mainly Settlements or Lotto winnings.

The Lotto winners tend to be dudes who waste the $$ big time.

[friedo]

Structured settlements can also include certain insurance claims, and JG Wentworth and similar also purchase annuities and annualized lottery payouts as well.

It’s a relatively low-volume business. Each potential deal is worth a lot, and they work hard to sell them. The frequent ads are factored into that – they try to achieve wide branding so that when you finally get a structured settlement, they’ll be on your mind when you decide to be stupid and sell it.

I’d be surprised if companies like JGW did more than a few hundred deals a year.

[Gfactor]

By 1991, structured settlement annuity sales totaled $4 billion. By 2005, structured settlement annuity sales had climbed to $6 billion.

“Lies, Damned Lies, and Statistics? Structured Settlements, Factoring, and the Federal Government,” 82 *Indiana Law Journal * 809 (2007): http://www.indianalawjournal.org/downloadattachment.php?aId=a3bdee6657a1d971e008090bc640d567&articleId=29 (pdf)

The industry took off for two related reasons, IMO. First, it had a favorabel tax treatment, as described in the article. Second, some tort reform statutes actually required future damages to be structured.

[Gfactor]

A classified advertisement in a Dallas newspaper caught Jim Lokey’s attention in 1989. A local tort victim wanted to sell his rights to future structured settlement payments in return for an immediate lump sum. Lokey quickly capitalized on the idea of buying the rights to secure future payments in return for a smaller lump sum and founded Settlement Capital Corporation (SCC) to process such purchases. These transactions are termed “factoring transactions” within the industry. SCC began buying rights to future settlement payments from claimants, giving claimants the opportunity to exchange the rigid structured settlement—that could not be accelerated or increased—for large sums of instant cash.

The idea caught on quickly, and companies eagerly lined up to join Lokey, including J.G. Wentworth, Peachtree Settlement Funding, Singer Asset Finance, Stone Street Capital, and Liberty Life Assurance Company of Boston. With claimants looking to gain large sums of money now rather than later and finance companies searching for alienable low-risk assets, the market for factoring had arrived. **In 2003, J.G. Wentworth’s Assistant General Counsel estimated that factoring companies purchased structured settlement payment rights from approximately 4,000 claimants in 2003, totaling $1 billion in assets. ** Given the existence of a $6 billion structured settlement industry comfortably subsidized by the public fisc, the factoring transaction industry has ample room for future growth.

Id. (Emphasis added.)

[ralph124c]

I used to work with a guy who was not too bright. He was injured in a motorcycle accident, and was provided with a structured settlement/annuity, by the other partie’s insurance company-this was pretty generous, but (of course) was paid over time.
This guy wanted a shiny new motorcycle-only he had no cash. What did he do? He sold his annuity for a pittance-so he could buy a new bike-wich he wrecked shortly thereafter.
What a dope.

[Schnitte]

I suppose they target a group that consists of not-too-bright individuals: People who don’t see how they are getting ripped off by such companies that essentially give them a loan at interest rates considerably higher than what a serious lender would charge.

There seems to be a lot of these people, and (no offence intended, 5que - I see the point about your medical leave) they tend to watch trashy afternoon shows more than others. Combine this with the fact that these trashy TV shows are abundant and darn cheap to produce (and thus TV ads are probably not too expensive in these slots), and you will see why there is an unusual concentration of such commercials during these hours of the day.

[Keeve]

I’ve long wondered how much they pay. For example, the NJ Lottery Powerball Jackpot for today is your choice of $79 Million as an annuity paid out over 29 years (30 payments), or $41.4 Million as a cash lump sum. If I won, I could sell my $79M annuity to these guys, and I would surely get less than $41.4M.

But how much less?

[Mosier]

@Keeve

I’ve long wondered how much they pay. For example, the NJ Lottery Powerball Jackpot for today is your choice of $79 Million as an annuity paid out over 29 years (30 payments), or $41.4 Million as a cash lump sum. If I won, I could sell my $79M annuity to these guys, and I would surely get less than $41.4M.

But how much less?

Why are you sure it would be less than 41.4m?

[Keeve]

@Mosier

Why are you sure it would be less than 41.4m?

Because Wentworth wants to make a profit.

I’m working on the presumption that the state lottery has $41,400,000 in prize money available for this particular game. And it used to be that the grand prize would be this amount, paid out as a lump sum. But then they saw how many people won the grand prize and just wasted it away, and so someone got the idea that the lottery commission could spend the prize money on an annuity, and that way even if the winner spends the entire prize, he will get more next year, and the year after that, for a lot of years. This had the added benefit of enabling the lottery to advertise much bigger jackpots – In the current example, through the miracle of compound interest, they can advertise a $79,000,000 jackpot even though there’s only $41,400,000 in the prize pool.

Now, I suppose it is possible that that with $41,400,000, the lottery commission could buy an annuity that is bigger than $79,000,000, and keep the difference for themselves. But why would they? Okay, there would be a small difference to cover the fees to whichever brokerage house they’re buying the annuity from, but besides that, I presume that they would like to advertise large jackpots, and they’d have no reason to do anything other than get as big an annuity as the money will buy.

Therefore, if I have an annuity which will pay me $79,000,000 in 30 payments over 29 years, then it seems clear to me that this annuity is truly worth more or less $41,400,000 at current market rates. And if JG Wentworth gives me $41,400,000 for it, then they’ll make no profit. And my question is this: How much of a rip-off are they? Will they give me $35,000,000 or more like $10,000,000?

(I do realize that many factors will work into this question. For example, they’ll probably pay a higher percentage for something that’s worth millions than something in the thousands. And they’ll probably pay better for an annuity from a highly-rated financial institution than if some company lost a lawsuit and has merely promised to make these payments. I’m just curious for some idea of how much of a cut they take.)

[LouisB]

When I was rear ended a few years back, I was unable to work for a couple of years. I had no workmen comp or unemployment as I was working as an independent contractor. Peachtree very nearly made me angry with a never ending bombardment of mail offering me money. I don’t remember the exact figures, but their rates were on a sliding scale; if you didn’t repay them within a certain time limit, your payback figures increased by a significant amount over and beyond their already extortionate rate. And the longer it took you to pay them back, the more the payback amount increased. Reading their figures made me wonder what percentage loan sharks were charging.

[Gfactor]

@Keeve

How much of a rip-off are they? Will they give me $35,000,000 or more like $10,000,000?

Some examples here: http://www.cockeyed.com/citizen/structured/structured.shtml

J.G. Wentworth may be willing to help you out, but it will retain a portion of your payout in return. The total amount it pockets is called the “effective discount rate,” which includes all its fees, and can total 9 percent to 15 percent or more.

Still, if you’re paying 30 percent interest on credit-card debt, doing business with J.G. Wentworth may be worthwhile. It may also pay you more for an annuity than you could make cashing it out, especially if your insurer charges a steep surrender fee for early withdrawal.

http://www.consumerreports.org/cro/money/credit-loan/jg-wentworth-annuity-cashouts/overview/index.htm

And here is an article that talks about some of the other drawbacks: http://www.bankrate.com/finance/debt/want-settlement-cash-now-not-so-fast-1.aspx

[Schnitte]

@Keeve

Because Wentworth wants to make a profit.

I’m working on the presumption that the state lottery has $41,400,000 in prize money available for this particular game. And it used to be that the grand prize would be this amount, paid out as a lump sum. But then they saw how many people won the grand prize and just wasted it away, and so someone got the idea that the lottery commission could spend the prize money on an annuity, and that way even if the winner spends the entire prize, he will get more next year, and the year after that, for a lot of years. This had the added benefit of enabling the lottery to advertise much bigger jackpots – In the current example, through the miracle of compound interest, they can advertise a $79,000,000 jackpot even though there’s only $41,400,000 in the prize pool.

Now, I suppose it is possible that that with $41,400,000, the lottery commission could buy an annuity that is bigger than $79,000,000, and keep the difference for themselves. But why would they? Okay, there would be a small difference to cover the fees to whichever brokerage house they’re buying the annuity from, but besides that, I presume that they would like to advertise large jackpots, and they’d have no reason to do anything other than get as big an annuity as the money will buy.

Therefore, if I have an annuity which will pay me $79,000,000 in 30 payments over 29 years, then it seems clear to me that this annuity is truly worth more or less $41,400,000 at current market rates. And if JG Wentworth gives me $41,400,000 for it, then they’ll make no profit. And my question is this: How much of a rip-off are they? Will they give me $35,000,000 or more like $10,000,000?

(I do realize that many factors will work into this question. For example, they’ll probably pay a higher percentage for something that’s worth millions than something in the thousands. And they’ll probably pay better for an annuity from a highly-rated financial institution than if some company lost a lawsuit and has merely promised to make these payments. I’m just curious for some idea of how much of a cut they take.)

Your reasoning sounds plausible, and it actually is confirmed by the maths, or at least appears to me to be so. If I got my maths right (annuity factors and everything), getting $41,400,000 now rather than $2,633,333 a year for the next 30 years (that gives you the total of $79,000,000) corresponds to an effective interest rate of about 4.8 % p.a. Now I don’t know the situation on the American market for private loans currently, but I suppose it is not possible for a private individual to get even a well-secured loan (selling your lottery annuities in exchange for a lump-sum now is essentially a loan secured by the creditworthiness of the lottery company) at this rate. Wentworth would be likely to charge more, and the interest rate the lottery company charges you when calculating the lump-sum is actually quite fair, considering the situation on money markets.

[Ferret_Herder]

Reported.