The ever so famous ad on tv has a ton of parodies online, and for good reason. “It’s my money, and I need it now!” offers those who own structured settlements the chance to get a larger lump sum of cash up front. These buyouts mean that you’re giving up your future income stream, though. Getting all that cash immediately means that you’ll be getting less money total than if you wait and get your payments over time. The only benefit is that you get money immediately. So, when is taking that offer a good choice?
Structured Settlements Explained
Structured settlements are just a stream of payments that one receives following some sort of legal arrangement. Meaning, you get these after there is a legal judgement handed down, through a claim from workers compensation, or in the case of an accident. The entity that needs to pay the structured settlement will purchase what is known as an annuity contract. They get these from insurance companies. This ensures that the settlement payments are guaranteed all the way through the life of the contract itself.
So, why would you sell (undergo a buyout). Your situation might change. You might want to pay for a wedding, get a new business going, or purchase a new home. Many people in these instances would opt to get a lump sum to cover these sorts of larger costs that can occur in life.
There are different opinions on whether or not this is a good idea. Let’s take a look at 3 of the leading thoughts on the matter.
Its Better to Sell Your Settlement
The firm that started all of those famous TV commercials (J.G. Wentworth) says that selling off your structured settlement payments is usually a better options to getting yourself a loan. This is because there’s no debt and no credit checks involved.
They have stated in the past that selling a structured settlement is the safest financial transaction anyone can undergo. This is because the majority of states in the U.S. actually have specific laws that say how a settlement can be sold. These laws also say that a judge must look over the deal itself to determine if its fair or not.
Maybe Sell, and Maybe Not
Another firm that handles settlement planning by the name of JMW Settlements Inc. has stated that the entire process of deciding to sell your settlement should be a slow one. It shouldn’t be impulsive in the slightest. They say that you should look at how valuable what you have is and then make your decision based strictly on solid information.
One firm, Voyant Advisors LLC, who offer investment management tools to financial planners, says that those who are considering trading away their future income source for one lump sum of money ask themselves 2 very important questions. These questions are: “Does this sell make sense for my financial strategy and goals in the long-term? Can I be completely disciplined financially?”
They would say that you go through and model out various situations in order to fully understand the value of the settlement itself. Then you can make it a complete part of your plan, whichever way you go.
It’s Better to Keep Your Settlement
One woman who works for the National Consumer Law Center, Margot Saunders, advises people not to sell. She states that those who need money right now should go out and get a loan, and then pay back that loan with what they are getting from their settlement. According to her structured settlements have been setup to secure their future financial interests. When you sell that away you completely undermine all of that at a high cost to yourself, she states.
Money’s Value Over Time
Firms that offer you a lump sum in order to buy your settlement will give you less than what you’d get over time if you keep it. What people should be looking at with this is just how much less they’re going to get. The math can be a bit complex to see if what is offered to you is a fair amount. The concept itself is fairly simplistic, though. You’d prefer to have money now instead of money later. Let’s take a look some examples.
- Would you prefer to have $500 now or $503 in a year? The vast majority of people would take that $500 right now as its not really worth it to wait a full year for an extra 3 bucks.
- Would you prefer to have $500 now or $1,000 next week? Well, that’s a big difference! The vast majority of people would prefer to wait a week for an extra $500. Wouldn’t you?
This is a vital concept in the world of finance. Money has what is known as a time value, and this is referred to as the Time Value of Money (TVM).
If you’re having a hard time with this concept, it can help to think of your buyout like a reverse mortgage. People with a mortgage borrow a specific amount initially, and then they pay it off over a long period of time. The total amount that they end up paying over time is larger than what they borrowed; in some cases much larger.
A buyout for a structured settlement works in a similar way, but in reverse. You’ll get a large total upfront and give up your payment stream. Instead of paying off your mortgage at a specific interest rate, you’ll be giving up your payments for a discount rate. The entity purchasing your payment stream is going to want to get that discounted rate as high as they can. You want to get that discounted rate as low as you can so that you get paid more money.
The firm that is trying to give you a lump sum to buy your structured settlement has their own expenses involved (remember those tv commercials?) and they will want a profit margin that meets their specifications, so they will try and give you the smallest amount they can get away with. We’ve seen people discussing discount rates in ranges between 8% all the way to almost 22% recently.
Let’s use an example of selling off a $1,000/month, 10 year annuity. That’s a total of $120,000 of income over the course of those 10 years. If yous ell that you might get anywhere between $48,000 to around $82,000. Definitely worth your time to discuss rates with different firms and get the best offer available if you decide to sell.
The Process of Selling
The entire thing often takes between 45 and 60 days, and that’s assuming everything moves forward without issues. Not exactly instant cash.
You’ll need a court hearing, and you’ll have to explain why the settlement you have isn’t meeting what you need financially any longer. The broker that you have will need to explain the discount rate being used. The entire thing can be stopped if the judge rules that it isn’t in your best interests to sell. That doesn’t happen often, though, since the meaning of “best interests” is quite obscure.
Let’s take a look at what you should be keeping an eye out for:
1) Get Plenty of Quotes
Speak with plenty of firms and get their quotes. Even if you’ve already sold off part of your settlement before and are looking to sell, go get more bids. Make sure you’re aware of just how many days you have before you can cancel without incurring a penalty.
2) Gather All Info and Disclosures
The different requirements for disclosures are going to be different based on the state that you’re in, but you need to ask about fees (the broker should be the one paying those), timing commitments, and you need to get a guarantee on the amount that they’re going to pay you (in writing).
3) Make Sure the Business is Reputable
Do checks on the business that you are thinking of choosing. See what their standing is with the BBB. Ensure that they’ve been around for more than a year or 2 and are able to do these transactions all over the U.S. Are they in a good financial state? How are they going to handle a payout to you if you only sell them a chunk of the settlement instead of the whole thing? The answer could cause issues with the part of the settlement that you end up keeping.
4) Meet with a Financial Planner and a Lawyer
You need to be completely knowledgeable about what sort of restrictions are in place when it comes to selling and undergoing a structured settlement buyout. Be aware of any potential tax issues. Understand how the sale will affect your future financials. Make a plan and then follow it without fail.