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Structured Insurance Settlements

What are Structured Insurance Settlements?

The type of insurance claims we're concerned with here result from the settlement of a personal injury lawsuit. The cash settlement is paid to you (the claimant) over time under some agreed upon payment structure--rather than in one lump sum. The insurance company for the losing party (the defendant) usually purchases an annuity that guarantees the payments to you, the winning party (i.e., the claimant or annuitant). Therefore, although you as the annuitant have rights under the Release and Settlement Agreement to receive the payments, the annuity itself is owned by the defendant's insurance company. Since you do not own the annuity, you cannot assign or sell it. However, your rights to receive payments are an asset that, like any other personal asset, can be sold for a lump sum.

Simply put, structured settlements are agreements to make payments over time in exchange for a release of liability. they are usually associated with the settlement of personal injury tort claims.

Sellers often ask how we can purchase their structured settlement payment stream when they've been told it can't be done. Here's how:

Under the settlement agreement, the plaintiffs (recipients of a structured settlement) are granted only the right to receive certain future payments in return for their release of the defendant's liability. To accommodate the payment of their obligations, the defendants (or their insurer) buy an annuity policy and either retain ownership or assign ownership to another company. The annuitant, therefore, does not own and cannot sell the policy. He does, however, own the right to receive the payments, which is considered personal property and can be assigned. All of the non-assignment language in the settlement agreement and the annuity policy is generally unenforceable according to the Uniform Commercial Code. While some states, including Texas and Illinois, have statutes that restrict the assignment of structured settlements, an assignment of the right to receive payments is perfectly legal and binding.

What is the purpose of structured settlements?

Structured settlements are important for their role in successfully resolving thousands of our nation's personal injury tort claims. At the time of settlement, the tax benefits to the defendant, the insurance companies, and the claimant make structured settlements mutually beneficial for everyone. Usually they continue to serve the interests of everyone throughout the term of the structure. Circumstances change, however, and the original intent of the structured settlement may no longer serve the interests of the plaintiff.

If structured settlements are so good for everyone, why do so many people want to sell them?

In life, the only constant is change. Since structured settlements are rigid, inflexible plans, they often fail their intended purpose. The fundamental flaw in the codes that underpin the structured settlement industry is the irrational assumption that the original structure will serve the best interests of the annuitant (and his beneficiaries) throughout the life of the structure. Beneficiaries' frequent use of the secondary market attests to the fact that their needs are often very different from the original claimant's needs.

Who are the sellers?

They are people who usually have a financial emergency but do not have access to traditional credit sources. Sometimes their financial problems stem from the very event that resulted in the settlement. Since we look only to the annuity and not to the seller's credit, we are able to provide funds to the seller that no one else will.

Why are the payments tax-free to the annuitant?

Through Internal Revenue Codes and certain Revenue Rulings, Congress and the IRS have codified the concept that a settlement for personal injuries simply returns, or attempts to return, through monetary relief, the injured party back to the position they were in before the injury. Since there is no gain but simply a return to "normal," the transaction has no taxable basis.

What are the seller's tax consequences of an assignment?

At the time of this writing the IRS had not issued a ruling on this matter, and although most insurance companies will say that the transaction is taxable, they simply do not know. Some accountants have advised their clients that the funds received from the sale take on the characteristics of the funds sold, i.e., tax-free in nature. Others have said that unless there is a gain, there is no taxable event, and since the transaction will actually produce an effective capital loss, there is no taxable event (i.e., the original premium used to purchase the annuity payments, which the plaintiff could have taken as a tax-free lump settlement at that time, was larger than a premium required to purchase an annuity that would have made all of the payments to the date of sale, plus the amount being received for the sale of the future payments). Anyone with any tax questions should consult their own tax authority.

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Inheritances in Probate

If you are an heir to an estate that is currently locked up in probate or a beneficiary of a trust due to make distribution(s) within three years, we can help you get immediate cash. You pay no points, interest or monthly payments. We simply purchase a portion of your future inheritance for an agreed upon lump sum of cash. The nature of these transactions makes further generalizations difficult. Simply call or e-mail us and we'll personally discuss with you your unique situation and explore all of your options.

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Lottery Winnings

If you have won a lottery that pays out over a period of time rather than in a lump sum immediately, we can purchase the remaining payments for cash now. This is available for most states.

Note: recent changes in many state lottery laws now allow people to choose either a payment stream over a number of years OR a lump sum amount when you turn in your ticket. As most people know, the lump sums offered are usually one-half of the total. In most cases, choosing the payment stream and then selling it on the secondary market will generate FAR MORE cash than one-half. This is an interestiong development because for years most state lottery commissions regarded selling future lottery payments as unfair to the lottery winner because they sell the payments at a discount. Then, when states decided to offer the lump sum payment choice, what do they offer? ONE-HALF OF THE TOTAL--far less than the secondary market offers! If you're not sure which to choose, call us with the anticipated lottery cash flow and we'll calculate what we can pay for it. Then you can make an informed decision as to which option suits your financial needs best. Understand also that when you choose the payment stream option you always have a choice: sell the remaining payments for a lump sum of cash; or, continue to receive the annual payments. When you opt for the one-half lump sum from the state, your decision is final.

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Prize Winnings

If you have won a casino jackpot or other type of prize winning that pays out over a period of time rather than in a lump sum immediately, we can purchase the remaining payments for cash now. This is available for most states.  Just us at 1-800-476-9644 for a free, no obligation quote.

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How much cash can I get today for my Contract?

The amount of cash any Contract will bring on the secondary market depends on three general variables: 1. The current economic environment; 2. The terms of the Contract (payment amount, interest rate if applicable, length of payback, etc.); and, 3. The probability that the investor will lose his/her money (degree of risk).

The current economic environment influences the yield or rate of return an investor requires when purchasing a note.  In general, the better the economy, the lower the cost of funds for the investor, and, therefore, the lower the yield we require on the investment.  Currently (March 2011), we are  in a good economic environment -- as far as interest rates are concerned.  Today's low interest rates means more cash for note sellers than ever before--and perhaps more than will ever be paid in the future.  

We must assess the terms of the Contract (#2) and the degree of risk (#3) individually for each Contract offered for our purchase. Many people would like us to quote a fixed percentage of the remaining balance on their Contract. This is not possible because of the infinite variability these two items possess. However, in most cases, we can evaluate all three of these components and make a cash offer while still on the initial telephone conversation with the Contract Seller.

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Can I sell just part of my Contract if I don't need all of my cash now?

Yes, in fact this is very common. It is referred to as a "partial purchase" and involves selling only a certain number of the remaining payments on your Contract. At CASCADE FUNDING, INC., we can purchase any number of the remaining payments in almost any manner you can think of. For example, let's say you have a Contract with a balance of $80,000 payable in 240 monthly installments. If you needed just $20,000 now for whatever reason, we would calculate how many payments we would need to purchase to provide you with that specific amount of cash. Precisely which payments we purchase depends on your personal financial situation. Here's a few of the options we could look at for you:

We could buy (Numbers are for illustration only):

Remember, all of the above options will provide you with the $20,000 needed today. The type of partial purchase chosen will depend entirely on your unique financial situation. In other words, you may choose the first option if you need $20,000 today and want or need to have a future monthly cash flow beginning in 5 years. You might choose the second option if you need $20,000 today and you need a monthly payment for the next 5 years until, say, your retirement benefits begin. And you might choose the last option if you need $20,000 today and also want or need the monthly 50% payment for the next 20 years.

There are many other ways we can structure a partial purchase for you. Our goal is to get you the specific amount of cash you need NOW while also addressing your financial concerns of the future.

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How long will it take before I have my money?

We have purchased Contracts in as little as one day. However, it has also taken over a year to purchase others. On average, it takes two to four weeks.

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Copyright 1997
Revised: May 17, 2012