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Buying secondary market settlements for yield

A report in todays Wall Street Journal sheds some light on the secondary market for factored structured settlements.
A factored structured settlement is an annuity (usually the paid as a settlement on a lawsuit) that pays a predetermined stream of income, often monthly over the course of many years. These annuities are typically issued by insurers that are unlikely to go bust, like AIG, John Hancock, MetLife and New York Life.
Sometimes the recipient decides to sell the stream of payments in order to meet current cash flow needs. Investors that decide to purchase these annuities in the secondary market are seeking the hi-yields – often 6-7 percent annually.
What are the potential dangers in buying a structured settlement.
First is the lack of liquidity. There is no easy market to liquidate secondary-market annuity; the firm that sold it to you usually will not buy it back.
As always – there is also the risk of fraud.
“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.
If you are willing to stand the illiquidity and are able to do the homework, then you can lock in big returns investing in these instruments. For most people, they do not make sense but for the sophisticated investor – they pay a premium.

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