The stock market is probably the most popular form of investment in the world, but that is up for debate especially given the value of transactions executed on a daily basis in the forex market. However, these two are not the only ways to invest. There is at least a dozen more alternatives out there. Fixed income investing is one of them, and this can be further subdivided into a few sections.

Investors who go for fixed income do so in a bid to diversify their investments in risky assets, like stocks and forex. The bond market is an attractive option, especially when you consider investing in T-Bills and Notes.

However, some investors aren’t quite as impressed with the yields in the bond market, which leads them to consider other fixed income investments like structured settlements. For those who are not quite familiar with this form of investing, Jeff Greenfield at SettlementSpecialist.com provides an in-depth insight into structured settlements.

Here is a quick rundown of how structured settlements work

Basically, when a plaintiff is compensated in a lawsuit, they can be paid in a lump sum, annuity, or a mixture of the two. It all comes down to what the plaintiff and the defendant agree depending on the circumstances of the plaintiff. In most cases, payments are usually made in installments given the fact this is the more effective way for the defendant’s insurance company from a cash flow perspective. In others, a lump sum is paid later, 5 years, 10 years, or even 15 years after the ruling.

After this, the insurance company finds investors willing to invest in the given structured settlement. Due to the different circumstances involving each case, annuity payments are often irregular and dissimilar to any previous case. For instance, some settlements might offer $2,000 monthly payments for the next 12 months, while other could offer $10,000 payment within the first two years and another $20,000 after three years.

Normally, what happens is that an investor pays a lump sum at a discount rate equivalent to the annual rate of return offered. It’s a classic (FVA) future value of an annuity (the principal amount paid to the plaintiff) versus (NPV) net present value (lump sum paid by the investor).

So, should you go for bonds of structured settlements?

Structured settlements are considered to be low risk investments thereby drawing comparisons to bonds. However, questions are often asked with regard to the high rate of return they offer investors compared to what is offered in the bond market. Structured settlements offer annualized returns of up to 15%, and even when the US base interest rate was at 0.25%, investors could still receive upwards of 4% in annualized returns.

Right now, the US 30-year bond yield stands at about 2.892%, and this is after the base interest rate was hiked to 1.00% in March—the third hike in just over 15 months. On the other hand, most structured settlements estimated are to provide an annualized return of about 7.5%.  This suggests that the investment risk could be higher in some way. Of course, one of the most popular investment guidelines is that “the higher the risk, the higher the return.” So, where’s the catch? Short answer, there is none.

However, structured settlements are not as liquid as bonds. You can buy and sell bonds in the secondary market, but when it comes to structured settlements, this might be tricky. As noted in a couple of paragraphs above, each structured settlement is likely to be unique to the circumstances of the plaintiff.

As such, payments are irregular. This means that the 7.5% offered is mostly theoretical and is only materially recognized when all payments have been made. Therefore, you shouldn’t expect regular payments of a certain figure at the end of every month, quarter, or year—unless that’s what the structured settlement between the plaintiff and the defendant states.

Therefore, it is correct to conclude that the premium offered by structured settlements is tied to liquidity thereby making this form of investment perfect for buy and hold investors. If you are looking to invest in a fixed income instrument that you could easily divest when the need arises, then you would be better off with bonds. While the return might not be as lucrative as that offered by structured settlements, the liquidity provides the investor with the flexibility of pulling out their investment.

In addition, when the payment period is long enough, the health of the insurance company offering structured settlements could deteriorate thereby increasing the investment risk profile while the investor’s funds are still tied to the company. American International Group’s (NYSE: AIG) case following the global financial crises of 2008/2009 is a classic example.