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.)