Structured Settlements: A Buyer s Guide for Investors Learn more about court ordered structured settlement transfers, why they are viewed as safe investments, and how they can help you reach your financial goals for the future. 2013
WHAT IS A STRUCTURED SETTLEMENT? Historically, compensation claims for injuries, liability and malpractice were paid out in lump sums. But, as the dollar amount of these awards began to rise dramatically in the 1970s, the courts began awarding structured settlements that protected the interests of both plaintiff and injured party. These courtordered agreements allowed the award to be paid out in installations over an extended period of time. An insurance company was assigned to set up an annuity that would provide guaranteed payments to the claimant on a monthly, quarterly or annual basis for a specified number of years. By relieving the burden of a lump sum cash award, structured settlements help the party judged responsible to avoid bankruptcy. They also help insurance companies balance out their risk over time. More importantly, they provide a secure income stream to the claimant. Signed into law in 1982, the Periodic Payment Settlement Act protected the plaintiff from bankruptcy and provided a guaranteed income flow for the injured party. The injured party receives a guaranteed, long-term flow of income to help pay for medical care or replace income lost due to an inability to work. The structured settlement also protects the injured party from senselessly spending a lump sum award in a short period of time, thus leaving him and his family stranded without a source of income. On the downside, the periodic payments are fixed and offer no liquidity and payments cannot be accelerated, increased or deferred. 2
How are structured settlements funded? Casualty insurance companies purchase special investment products called annuities through life insurance companies. They are purchased for a fraction of the cost of the judgment. These annuities are set up to automatically fund periodic payments to the claimant who is named as the annuitant or payee. Payments continue for an agreed period of time, which can range from 10 to 50 years or, in some cases, the annuitant s lifetime. In the end, the claimant will have received the total amount of the award for damages. With the purchase of an annuity, the obligation to guarantee the recurring periodic payments, as set forth in the court agreement for the structured settlement, is assigned to a third party. Lottery winnings are another example of a structured settlement. Here, the winner also receives periodic payments secured by an insurance company in lieu of a lump sum payout. Can a structured settlement be sold? Receiving guaranteed periodic payments may be the perfect solution for many individuals, but for others having their money locked up in an annuity can be frustrating and inconvenient. There are situations in which having access to a lump sum payment would be preferable. Valid reasons for wanting to cash out or sell a portion of a structured settlement might include: buying a home, paying off a large debt, sending a child to college or starting a new business. 3
Can all structured settlements be sold? No, there are specific types of structured settlements that typically cannot be sold. They include: Worker s compensation payments Payments to a minor Pensions Social security payments VA disability or pension In all other cases, the Structured Settlement Protection Act of 2002 requires a judge to review the particular circumstances behind the request for sale to determine whether or not it is in the best interest of the holder to sell his annuity. The court will look at the reasons for the sale and take into account the financial situation of the individual or family to determine whether the sale is well advised. How does an owner sell all or part of his structured settlement? He must find a buyer. Generally, that will mean researching funding companies that purchase structured settlements. An annuitant may also sell directly to an individual, an investor - like you. The lump sum payment that the annuitant receives will always be less than the value of the payments being sold to you. Why? Because the annuitant is receiving the present day, discounted value of the payments in one lump sum a discount that, in effect, yields an annual increase to your investment during the remaining payment term. 4
You must pay a lump sum to the annuitant, and in exchange you will obtain the rights to receive the future insurance annuity payments. You ll ultimately gain back more than you invested. All of these payments are guaranteed by highly rated insurance companies and issued with safe and highly regulated insurance annuities. How is present day value determined? Woodbridge uses a formula that corrects for inflation and calculates the current discounted value of future payments. Remember, these payments will be paid out over a period of 5, 10, 20, 30 or even 50 years. Think of it as the reverse of a loan. If you were to take out a 20- year loan for $100,000 at an interest rate of 5.00%, in the end you would have paid out $156,921.60 in 240 monthly payments of $653.84 to the bank. When buying a structured settlement, to determine purchase price we work backwards by starting with the aggregate payout in this case $156,921.60, in the form of 240 monthly payments of $653.84 and discounting each year with an effective interest rate of 5.00% using a monthly compounding formula, starting in 2033 until we reach present day discounted value of $100,000. Also affecting present day value payouts are the standard legal, filing and court fees, lien searches and transfer fees and other transaction costs, which are deducted by Woodbridge before quoting a lump sum amount to a seller. What is a structured settlement transfer? When the owner of a structured settlement wants to sell the rights to some or all of his future periodic payments in return for a lump sum payment, those rights must be legally transferred to 5
a buyer with a court order. This is what is known as a structured settlement transfer. All of the terms of the original agreement remain intact and the future payments being sold are then legally assigned or transferred to the buyer. For investors looking for a safe, predictable investment, purchasing these future payments offers steady, virtually risk-free growth. THE BENEFITS OF INVESTING IN STRUCTURED SETTLEMENTS Predictability Unlike the stock market that involves many ups and downs as well as variables that are out of your control, structured settlements offer certainty. The terms are specified in the settlement and, as an investor, you are guaranteed those terms regardless of what is happening in the economy. You are not subject to shifting consumer trends or market volatility. Plus, there s no need to monitor your investment or fret about buying or selling shares based on the vagaries of the stock market. Structured settlements are worry-free investments. Protection by Federal law The Structured Settlement Protection Act mandates that all structured settlement transfers be carefully reviewed and approved by the court; this helps to protect the interests of both buyer and most importantly the seller. Once the transfer is complete, your rights to receive these payments, even in the extraordinary case of insolvency of the backing insurance company, are also protected by this Federal law. 6
If you are considering investing in a structured settlement, seek the counsel of a trusted financial advisor. He or she will look at your total financial picture and can help determine whether or not a structured settlement transfer is the optimum investment for you. Higher yields than other safe investments Since the recession, interest rates on CDs and Money Market accounts have plummeted. In many cases, banks and other financial institutions are offering less than 1%. There is no telling how long rates will remain at this low, low level. Many investors are looking for other ways to secure their money and watch it grow. One answer is purchasing a structured settlement. These investments offer a 4-8% annual yield while providing a reliable stream of income or a generous lump sum payout at a specified future date. Payouts to fit your financial goals What helps make structured settlements a good option for so many people is the wide variety of offerings that are available. For instance, a young couple might choose to invest in a structured settlement that pays off in a lump sum in 15 years (just about the time their daughter will be heading off to college). Or, a retired couple might choose to buy a structured settlement that offers a 7% annual yield with an income stream of $1,500 per month for 25 years (enough to supplement their pension). Remember, structured settlements are established to benefit the original owner. Some offer weekly, monthly or annual payouts and some end with a lump sum payment at a pre-determined 7
future date. Before purchasing a structured settlement, carefully examine your financial goals. Your personal objectives will help you select one that best meets your needs. HOW SAFE ARE STRUCTURED SETTLEMENTS? During the last 20 years, the security of structured settlements has improved in many important ways. All states have approved rules that minimize the risk that any issuer of structured settlement annuities will become insolvent. These rules also maximize the safeguards that are available to structured settlement annuitants in the unlikely event of insolvency. These rules include: Tightened accounting rules, including imposition of risk-based capital testing Mandatory annual audits Uniform guidelines requiring that investments meet standards for security Minimum capital and surplus requirements Independent reviews and spontaneous audits to ensure compliance Structured settlements are funded by insurance company annuities. A higher risk-based capital ratio indicates greater financial security. In the extremely rare event that a life insurance company becomes financially troubled, state insurance commissioners have the authority to take immediate action. With court supervision, the insurance commissioner will attempt to build the company s capital so that it can continue to meet its obligations. If the troubled company cannot be rehabilitated, the commissioner conducts an orderly liquidation, in which policy claims, including claims under structured settlement annuities, receive priority. 8
Before investing, it is wise to take a look at which insurance company is backing the structured settlement you are purchasing. Make certain it is a top rated firm. For investors who choose predictability over risk, purchasing a structured settlement offers peace of mind along with a good return. It s also a great way to balance out a portfolio that may lean heavily toward risk. THE RISKS IN INVESTING IN STRUCTURED SETTLEMENTS While there are virtually no risks in purchasing a structured settlement, you should be aware of the following before deciding to invest in one: 1. Insurance Companies The quality and safety of these payments are directly related to the financial health of the insurance company that issued the original structured settlement. 2. No Financial Liquidity You will have no immediate access to the money you have invested should an emergency arise. 3. Fixed rate of growth While a structured settlement transfer guarantees investors a very good rate of return, it is a fixed rate. Should interest rates suddenly increase, your investment will remain at the fixed rate. 4. Not FDIC insured While structured settlements are backed by secure, highly rated insurance companies, it s important to note that your investment is not FDIC insured. However, the Structured Settlement Protection Act of 1982 provides an added level of protection. In the 9
unlikely case that the insurance company backing the settlement defaults, the annuity will be assigned by law to another insurer. However, structured settlement annuities like other insurance products are covered under State Guarantee Associations. 9 STEPS TO COMPLETING A STRUCTURED SETTLEMENT PURCHASE Choose an offer that suits your financial goals Either you or your financial planner/accountant will receive a daily listing (inventory list) of structured settlements available for purchase. Each investment offer should be examined carefully to determine which best meets your individual objectives when it comes to growth rate and income stream or future lump sum payout. Verify availability and request paperwork Call or email to verify availability and submit buyer information to request paperwork. Indicate acceptance within 48 hours As soon as you request paperwork and reserve an offer, it is taken off the list and is no longer available to other investors. Paperwork is then drawn up and must be returned within 48 hours with required funding or the case will return to the available inventory. Sign the Master Assignment and Assumption Agreement (MA) This document needs to be signed and returned. It must be signed only once and will be held on file. It serves as an affidavit that protects the rights and privacy of both the seller and you, the buyer. Sign the Offer Sheet (OS) This document needs to be signed and returned. It outlines in detail the specifics of the offer. It should be reviewed 10
thoroughly together with your financial planner or legal counsel. Fund the escrow Depending on the status of an offer, either a 10% deposit or full purchase price will be required. You will be notified what the funding requirements are when you initiate your purchase. If you are planning to use qualified funds in an IRA, you should ensure funds are with the IRA custodian prior to initiating your purchase. Deposits are waived on IRA transactions after verification of funds with IRA custodian. Note your hearing date A court date will be set for a hearing before a judge. Full funds must be in escrow at least 30 days prior to that scheduled date. The judge will determine whether or not there is good cause for the sale and whether or not the transfer is in the best interest of the structured settlement holder. If the judge denies the transfer and the petition is not re-filed, the transaction is terminated and all monies held in escrow will be refunded to you. Review closing book Several weeks after a judge approves the transfer, you will receive a closing book with all your supporting documents. The closing book contains details of the court-approved transfer including the court order and the acknowledgement letter from the insurance company (or lottery commission) that assigns the structured settlement to you. Finalize purchase (close escrow) Once you ve completed final review of the closing book and approval of final funding instructions, escrow will be closed and your purchase will be finalized. 11
The entire process can take anywhere from 30-180 days. After the closing, you will begin receiving scheduled payments in accordance with the structured settlement agreement. STRUCTURED SETTLEMENT TRANSFERS: ADDITIONAL C ONSIDERATIONS Are there any hidden fees or costs? When purchasing a structured settlement through Woodbridge Structured Funding, LLC, there are no extra fees. All fees are paid by the seller or by Woodbridge. There are no costs above and beyond the final purchase price, determined on the final funding date and effected in the final funding instructions. Conservative and less sophisticated investors like the friendliness of a one-time decision to obtain a safe, guaranteed, fixed-rate and term high-yield income agreement, backed by a highly rated insurance company and removed from the volatile swings of the markets. Will I pay more than the purchase price listed? 12
The purchase price listed on the offers is strictly a projection based on a date. Typically, this price will go down, since the actual price you pay is determined on the closing date of the purchase (usually prior to the projected date). If the price is reduced by the time of closing, you will receive money back. In a small number of cases, long delays will cause the price to increase slightly if closing is on a day after the projected date. This is because of its closer proximity to the first payment. Ultimately, the final purchase price should be considered the only final price and the funding instructions will indicate this final purchase price prior to funding and completion of your purchase. How will payments be made? If you have purchased a structured settlement that provides periodic payments, the monies will be distributed by check or electronically transferred into an account that you specify. Every insurance company is different in how they handle changes to payment distributions. You may contact them directly to inquire. How are purchased structured settlement payments taxed? The annual growth of your structured settlement will be taxed as ordinary income each year (except in the case of lottery winnings, where taxes are withheld and a W2 is filed). What happens to my payments if I die? Depending on how you purchase the structured settlement, there are several possible scenarios: 13
If purchased with your own personal name, the payments will continue to be paid and handled by your estate and distributed based on a will or other directive left behind. If payments are purchased with an IRA or Trust, the payments are perpetual and will be inherited by the beneficiaries of the Trust or IRA. The annuity is held in joint tenants with right of survivorship (JTWROS). It is advisable to review titling options when reviewing structured settlement offerings with an attorney or financial advisor to find out which of these options best suits your needs. There are many more options that should be reviewed and considered. What if I need to sell in the future? Structured settlements are non-liquid investments and payments cannot be accelerated, increased or deferred. If you decide to sell, then the lump sum payment you receive will be only a percentage of future value. Consider using an entity like an LLC to make the sale of payments in the future less costly. If you think you may need to sell the structured settlement at some future date, consider buying it with an entity so that the LLC owns the rights to the settlement. C ONCLUSION The decision to purchase a structured settlement depends heavily upon your financial goals. For individuals looking for a low-risk investment that pays a higher yield than today s Certificate of 14
Deposit and Money Market accounts, structured settlement transfers offer an attractive alternative. But, before purchasing, remember that this is a non-liquid, fixed-rate investment. Carefully review each offer you are considering with a financial planner or accountant and weigh all your options before making a decision. If you have any further questions about structured settlement transfers, contact your Authorized Representative. 15
ABOUT WOODBRIDGE STRUCTURED FUNDING, LLC Woodbridge and its predecessor companies are pioneers in the financial services industry. Nearly 20 years ago, Woodbridge was the first to innovate the purchase of future periodic payments in return for a lump sum. Since 1993, Woodbridge Structured Funding, LLC, together with its predecessor companies and founders, has purchased over one billion dollars in structured settlements, lottery winnings, and various jackpots. A leader in the field, Woodbridge Structured Funding relies on proven, trusted techniques and years of experience in order to craft innovative solutions that work for its clients individual financial needs. The company puts its expertise to work for its clients, allowing them to best utilize their financial resources in order to meet current and long-term goals. 16