Rob Saker's Blog

A down economy brings out the worst in some firms. We’re seeing more ads featuring cash for jewelry and annuities.  There are several companies that are running “cash now” advertisements. J.G. Wentworth and Peachtree were the most common advertising companies. 

I say troubling because the message in these advertisements plays on the lack of knowledge of finances with “it’s yours, why should you wait,” theme. That they’re advertising on TV isn’t surprising, but what is surprising is the frequency and breadth of distribution of these ads.

There must be a large number of structured settlements and fixed annuities for these companies to run national media campaigns.

How Annuities or Structured Settlements Work

A structured settlement is usually an annuity, but an annuity isn’t always a structured settlement.   An annuity may come from winning a lottery, inheritance, or a structured settlement (from winning a judgement in a suit).  Rather than taking a one-time lump-sum payment, the payee in a fixed annuity receives a series of consistent payments of a set period of time.  The advantages of an annuitized stream is that you get a known, consistent rate of return on your investment.  Regardless of whether the market goes up or down, your annuity is locked at a certain rate.  For this reason, companies offering annuities either offer them at variable rates or low fixed rates.

Annuities are a good option for people that need predictable cash flow, but their returns are lower than the average market return for any 10-year period.  Annuities guarantee a specific rate of return for the life of the annuity, so both a risk premium and profit to the issuer (typically a life insurance company) are factored into the rate.

Structured settlements are also attractive to the losing party in a lawsuit.  They’ll end up paying more than the lump sum payment over time but it helps companies manage their cash flow by making the total payment over a period of many years.

How the Consumer Loses

When offered a lump sum versus an annuity, it is generally recommended the person take the lump sum.  The interest returned in the market on a lump sum outweights the amount that would be received in payments. 

Some consumers prefer knowing they’ll receive a payment each year for a fixed amount, even if this is a financially less sound route. My sense is these people use this as a way of forcing control of their spending. “I can only spend $50,000, because that’s what I’m receiving this year.”

These companies offer a one-time cash payment for a structured settlement or an annuity. This means a consumer could lose twice. When initially offered a lump sum, they take the less attractive annuity. They then pursue a lump sum.

It gets worse. In many states the purchase of structured settlements for up-front cash has been unregulated. Where interest rates on credit cards and other loans have limits of around the still exorbitant rate of 25%, the rate charged for some structured settlements was as high as 70%.

Conclusion

I usually find it difficult to fault companies for their practices, but this type of marketing borders on predatory.  I suspect these companies are able to evade lending practices because they’re not lending, but rather buying the annuity at a significant discount.  I’m not evaluating the promotion of these products for their return. The fact that they’re advertising on mass media as much as they do speaks volumes to the returns they’re generating.

I attended an entreprenuership breakfast a few years ago, and one of the presenters was touting loans against receivables. The audience groaned. Loans against receivables are offered for companies with serious cash flow problems. The consensus of the 100+ audience was to never borrow against receivables.

My advice is that if you have a structured settlement and are in need of a loan, talk with your local banker about options. You’ll find better long-term advice.

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