I received a disturbing phone call today from "someone who has business dealings with the annuitant and the financial advisor" to a tort victim who was seeking a quote to sell a structured settlement.
Annuity set up in 1983
Annuitant is a resident of the State of California
Annuitant receiving monthly income of $7,979/month for life
Lump sums as follows:
11/1/2008 $ 200,000
11/1/2013 $ 250,000
11/1/2018 $ 300,000
11/1/2025 $ 425,000
11/1/2028 $ 500,000
The caller stated that the annuitant wanted to keep the monthly payments but was seeking quotes to sell ALL the lump sum payments, totaling $2,675,000 with the stated purpose being nebulous "investments". that the caller could not be more specific about.
On observation, given the date time elapsed since the structured settlement was set up:
- I surmised and confirmed that the annuitant was profoundly disabled and continues to suffer from the sequelae of the occurrence 25 or more years ago.
- The structured annuity was set up at a time of high inflation when interest rates were in double digits. The IRR of the structured settlement is more competitive than anything offered in the fixed income market place today and it is income tax free. Given the time that the structure was created it is possible that the structured even beats more aggressive investments in today's market, with minimal risk.
- The annuity issuer is Metropolitan Life Insurance Company, one of America's largest and strongest insurance companies.
Just for the exercise I ran the numbers through the Structured Settlement Factoring Discount rate calculator to approximate what a bad deal factoring all of these payments would be and the results meant well over a million dollars in tax free interest lost IF ALL payments were sold.
I explained this to the caller and questioned the wisdom of proceeding any further with a very expensive source of funds for a nebulous investment on a day when the stock market is down over 300 points and CNBC reports that the market is headed for its first annual loss since 2002. I also informed him of the recent cases under the California Structured Settlement Protection Act and the burden of proof concerning the purpose of the proposed factoring.
Consulted for the purpose of this post, Andrew Cravenho of Settlement Quotes, LLC factoring exchange says that the 2008 payment could not be factored and would not make sense to factor, but that at an 8.204% discount rate the annuitant could receive a whopping $635,802 for the remaining $2,475,000 income tax free structured settlement payments. Cravenho tells me that the numbers assume a profit of approximately $5-6K.
If one of the usual cast of characters steps in with a richer 11% discount rate the profit margin to the factoring company swells to $230,000! Great for the factoring company and the bloated hedge funds behind it but will someone please call Stabler and Benson over at SVU and tell them to Go West?
What financial advisor is telling a profoundly injured tort victim to trade their long term financial security for an investment under these circumstances in today's market? Tort victims need to be protected from such opportunists.