Some television commercials and advertisements may seem to imply that getting a quick cash payout on a structured settlement or annuity is just a phone call away. Rather, it's a court-controlled process that comes at the discretion of a judge. A phone call to an advertised 800 number is only the beginning of a lengthy process, and a regulatory framework mandates that every single transaction goes before a judge who must decide if the transaction can move forward.
The payee, the structured-settlement holder, must prove that they have a legitimate need for the money and calculate the payout amount that they are requesting. While regulations for annuities and lottery winnings can differ, the payee can't turn a structured settlement into cash simply because he wants a new car, a nice vacation or an RV to tour the country. In order to keep unscrupulous companies at bay, most state laws also require that the transfer of the settlement rights are in the best interest of the payee.
Tony Mitchell, CEO of Imperial Structured Settlements in Boca Raton, Fla., says the legal framework benefits the companies and the payees because it creates a clear path for judging transactions. When a structured settlement holder calls, an agent and team will review the settlement, circumstances and reasons the applicant needs the cash. Only then will Imperial move forward in the process because there's no point in carrying it any further if a judge is likely to decline the transaction.
"The court-ordered process does a lot of the homework for you because you're bringing these things before a judge who will take care of many of the processes. It's an extensive process, and people should be aware of that," says Mitchell.
From the time a payee calls to the time they receive money is usually more than 30 days, if not much longer, depending upon the jurisdiction. Just how payouts are determined can depend on countless factors, ranging from age and health to the reason the client needs the money and the rating of the insurance company making the payments.
David Lewis, senior vice president and general counsel with Stone Street Capital, LLC, says few people sell their entire transactions at once. Payees usually sell a portion of their payments, just enough to meet their financial needs, and offers from companies are detailed in disclosure statements with discount rates and all the information they need to make an informed decision. Lewis says other factors that go into determining the payment amount include in which state the payee resides, the payments they want to sell and the size of the payments.
"It gets pretty complex and regrettably has become more complex recently. The amount is a function of many factors, and these factors are more sensitive today than they might have been a year ago," says Lewis.
Lewis specifically points to insurance companies who have seen their credit ratings downgraded over the past year. The cost of funds and capital has also gone up, and developments throughout the credit markets can have big implications in the structured-settlement industry. With the recent banking crisis, fear has spread about the vulnerability of cash and assets kept in certain institutions. Despite the fear and bad press, Lewis says he hasn't seen many people looking to cash in their payments in a panic that it won't be there. A judge would also unlikely accept that fear as a reason for selling payments anyway.
"If someone called for that reason, we wouldn't do business with them and would just tell them not to be worried. We would be buying that annuity anyway so if we thought it wasn't going to be good, we wouldn't be buying it in the first place," says Lewis.
Craig Guillot is a freelance writer in New Orleans.