Want settlement cash now? Not so fast! - Bankrate

debt

Highlights

• $6 billion worth of new structured settlements are written each year.
• There were more than 35 million annuity contract in place at the end of 2007.
• Before you can get cash out, you will have to prove a critical need for the money.

From multinational corporations to working class families on Main Street, it seems just about everyone is searching for cash and liquidity these days -- often in some rather unusual places.

Selling annuities, structured settlements, scheduled lottery payoffs or other ongoing payments for cash has become more popular in recent years, and now that a cash crunch has set in, more people are looking at their options. Unless the financial predicaments are dire, most financial advisers recommend against cashing in annuities or structured settlements. Selling off an annuity can trigger surrender charges as high as 10 percent, and those who sell before age 59½ can also face federal taxes and penalties. Structured settlements are attractive because they generally provide tax-free income for life.

Yet sometimes cashing in is the only option. That $500 monthly payment from an accident in 2002 may have helped with the medical bills early on, but if the beneficiary has now lost his job, watched his investment portfolio shrink by 40 percent in the past year and is on the verge of losing a home, a lump sum payout of $50,000 may seem quite enticing.

Americans have a great deal of money tied up in structured settlements and annuities, and more than $6 billion worth of new structured settlements are written each year, according to the National Structured Settlements Trade Association. At the end of 2007, there were also 35.1 million individual annuity contracts in place exceeding $2.02 trillion, according to LIMRA International, a nonprofit group that compiles life insurance data.

J.G. Wentworth is one of the world's largest buyers of structured-settlement payments and annuities and has handled more than $2 billion in payment transfers over the past 15 years. Chief marketing officer Ken Murray says that the company has seen a steady increase in customer inquiries in the past year. Despite what is happening in the economy, there are always people looking to sell annuities, structured settlements and lottery winnings, Murray says. Due to the nature of the business, buyers of payments usually see customers when they are in some sort of financial predicament.

"Historically, the common denominator is people who need cash, but there are some new reasons we are hearing more frequently than others as a result of the recession. It might be the fact that they lost their job or their mortgage payments have increased," says Murray.