I was listing to WEEI sports radio last week when I heard an advertisement pushing structured settlement investments. The juicy 5%-7% yields are hard to ignore in this low interest rate environment as is the annoying sales pitch. But you want to stay away from this toxic waste. There’s a reason they sound too good to be true. This article from 2010 helps sum it up for you.
What are the potential dangers in buying your very own high-yielding hunk of a lawsuit?
High yields, but unsuitable for most investors.
First is the lack of liquidity. Imagine you expect to hold one of these annuities for 20 years. Then tomorrow, without warning, you face a medical emergency and urgently need to cash in your principal. There is no tertiary market for a secondary-market annuity; the firm that sold it to you usually will not buy it back. Furthermore, the fine print of the original court order entitling you to the payment stream may forbid you from ever selling it to anyone else, says Michael Miller, who specializes in structured settlements at Drinker Biddle & Reath in Philadelphia.
A less obvious but more ominous risk is that you could lose your rights to receive the income. Last July, a federal-court judge in Dallas ruled that a factoring company that had purchased an income stream from a personal-injury claimant had no right to retain or resell it, because she had already sold the same payments to another factoring firm five years earlier.
Anyone who buys into a deal that was originally settled before 2002 could be exposed to this risk, says Mr. Miller.
“If you’re going to deploy any real capital, you need to do some real homework,” says Jim Terlizzi, chief executive of Peachtree Financial Solutions, a structured-settlement packaging firm in Boynton Beach, Fla., that sells exclusively to institutional investors. You will need to verify that the documents signed by the original seller are valid, that the court order originates in the proper jurisdiction and that your contract fulfills all the state and federal requirements. You should also call the annuity issuer and the company that services the annuity payments to confirm that you are officially recorded as the new recipient.
A professional due-diligence report might mitigate some of the risks. It will run you $600 to $1,500, estimates Robert Thompson, a former insurance executive who now heads Sage Financial Design, a financial-planning firm in Simsbury, Conn.
If you can’t stand the illiquidity and are unwilling to do this much homework, then you have no business investing in these instruments. For most people, the yields on this sort of deal really are the stuff of dreams.