Size of Secondary Market in Relation to Size of Overall Structured Settlement Market
A Towers Perrin study* reported that in 2006 $161 billion was paid to injury victims and their attorneys. If one assumes that one third of this amount represents contingency fees, then approximately $105 billion is paid to plaintiffs each year. New structured settlements are created at a rate of approximately $5-6 billion every year. According to Standard & Poor’s**, in 2004 the cost of all outstanding structured settlements was approximately $80 billion and was expected to grow by $6 billion that year. Also according to Standard & Poor’s**, as of 2008, there were more than 500,000 structured settlements contracts outstanding in the U.S.
Structured settlement payments offer flexibility for uncertain times and changing circumstances.
The average person does not know much about selling structured settlements. Without an understanding of the benefits of structured settlement payments versus lump sum payouts, most injury victims tend to choose a lump sum payment.
In fact, Joseph M. Costello, Chairperson of the National Structured Settlements Trade Association (NSSTA) Marketing Committee, reported at NSSTA’s 2007 Winter Meeting and 2007 Annual Meeting that just 7% of personal injury settlements between $75,000 and $100,000 include structured settlements and only 30% of personal injury settlements above $1 million include structured settlements.
An AIG study*** conducted in 2007 shows that the less a person knows about structured settlements, the less likely he or she will choose a structured settlement. And, more importantly, the opposite holds true: the more a person knows about structured settlements, the more likely he or she will select a structured settlement instead of a cash payment.
In the study, AIG asked people how they would prefer to receive a settlement. With no explanation of the difference between selling a lump sum payment and selling a structured settlement annuity , 65% chose a lump sum and 35% chose a structured settlement. But after receiving explanations of the differences between a lump sum and a structured settlement, 73% chose the structured settlement annuity payments and only 27% chose the lump sum payout, a complete switch.
At the end of the survey, AIG concluded that “the structured settlement industry needs to educate Americans about structured settlements”.
Once they learned about the benefits of structured settlements, plaintiffs said that a primary reason that they would choose a structured settlement annuity is because it provides a reliable income for monthly expenses and guarantees financial independence. What may not be as clear to plaintiffs nowadays are the many options and the flexibility that a structured settlement offers.
Once a person receives the cash from the lump sum payment, he or she cannot simply change his or her mind and switch to a structured settlement payment. However, if an injured person chooses a structured settlement payment, he or she has the option at a later date to sell all or part of the settlement in the secondary market, for immediate cash, while still retaining a portion of the income stream.
Section 5891 of the Internal Revenue Code and the Structured Settlement Protection Acts at the state level give payees the option, with court approval, to transfer structured settlement payments from themselves to factoring companies who buy structured settlement payments. Given the flexibility offered by the buying and selling on the secondary market, structured settlement payments may be a better option for those people who are uncertain about whether to choose a structured settlement or a lump sum payment.
Very few people actually sell structured settlement payments
Out of the total outstanding amount of money currently held in structured settlement annuities -more than $80 billion- less than $800 million is transferred on the secondary market each year. That means that only about 1% of structured settlement payments are sold each year.
Only about 1% of structured settlements are sold or traded in the marketplace.
Not a lot of people sell their structured settlement annuity payments. In fact, 99% of people do not sell structured settlement payments. Those who do choose to sell structured settlement payments typically do so because their circumstances have changed, and they need the cash for a specific reason (medical procedure, debt reduction, education, etc.). The cash is used as an escape valve, to help people reduce some of life’s pressures so they can deal with a problem or an opportunity.
Life is full of changes: why should a structured settlement be forever?
Most homeowners buy houses using 30-year mortgages only to refinance many years before the end of the mortgage term. Consumers sign up for long term life insurance life insurance policies which are intended to be in force for extended periods of time. But then they stop paying the premium and let their coverage lapse. Why ? Because their lives change, their circumstances change. Maybe they can no longer afford the premiums, or maybe they can get better coverage elsewhere. The point is that, at the outset, the initial long term commitment made perfect sense, and then as life moved on, a change made more sense. Each year between 3.5% and 7% of all life policies are allowed to lapse by the insured person****.
Circumstances change. Lives change. A person who received a structured settlement as compensation for an injury may want to enroll in college or job training and may decide selling structured settlement payments for cash now is the best way to pay for his or her education. Or an annuitant who received a structured settlement as the result of an injury may have the opportunity to buy or renovate a house to better suit his or her way of life. Selling a structured settlement for a lump sum of cash may be a prudent way to cover the down payment on a house, pay off a mortgage, pay off taxes or to pay off credit card debt.
Even the insurance companies who issue structured settlement annuities recognize that there needs to be an escape valve. Most insurance companies include death commutation riders when they create structured settlement annuities. These riders allow an estate to cash out the deceased person’s structured settlement annuity-usually in order to pay estate taxes. In addition, two large insurance companies, Symetra Life Insurance Company and Allstate Life Insurance Company, recognize the need for an escape valve in other scenarios and will buy structured settlement annuity payments themselves.
Lawsuit awards are a mechanism by which our justice system tries to compensate victims for their damages. Structured settlements are a tool that helps to customize and maximize an award. A future stream of guaranteed payments is of great financial and emotional value for plaintiffs when they are feeling their weakest and most vulnerable, because it provides stability and comfort at the time that it is needed most, at the time of the injury. However, no one has a crystal ball – life changes and circumstances change, whether it is much needed surgery, a new roof on a family home or job re-training to react to new opportunities. And structured settlement payments can be sold for a lump sum of cash to meet these needs. The ability to access a portion of a structured settlement is a benefit that many industry professionals believe adds to the value and benefit of a structured settlement, allowing it to be utilized to the fullest.
As a society, we get divorced, even though we were not supposed to be parted until death; we re-finance 30 year mortgages decades before they come due; we commit to life insurance policies and then stop paying the premiums â€“ all in response to changes in our lives. So, it should not come as a surprise to anyone that recipients of structured settlement payments may need to sell structured settlement payments and cash out part of their payments in order to deal with life’s changes, challenges and opportunities.
At the end of the day, if 1% of structured settlement payees sell structured settlement payments in whole or in part, then, for them, the structured settlement is doing what it was set up to do: to provide them with the emotional and financial help when they need it the most. And for the 99% of annuitants who do not sell their structured settlement payments, the structured settlement payments will continue to provide the financial support that was intended at the start.
*Towers Perrin, 2007 Update on U.S. Tort Cost Trends
**Standard & Poor’s, Methodology and Assumptions for U.S. structured settlement payment securitizations, December 11, 2008
***AIG 2007 Survey as reported by AIG on the AIG website, sponsored by AIG American General Structured Settlements, conducted by Esearch.com, Inc. in September 2007
****2007 U.S. Individual Life Insurance Persistency Update by LIMRA International and the Society of Actuaries (SOA)