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Structured settlements explained
A structured settlement is a type of payment from an insurance company after you’ve successfully settled a lawsuit against their client. Instead of receiving your settlement in one large amount, you get a stream of monthly payments instead. These are completely tax-free and provide you with a consistent source of income for years to come.
On the downside, you don’t have a lot of access to the cash you’ve been awarded outside the settlement terms. If a financial emergency arises and you need more money, your only option for tapping into those funds is to sell some or all of your future payments. However, you don’t get the full amount due to a discount rate applied by the purchasing company.
What’s the discount rate?
The discount rate refers to the fee charged by the purchasing company that is deducted from the future value of your remaining settlement. When you start collecting free quotes from different companies, you’ll probably see discount rates ranging between 9% and 18%, although it can go even higher.
The reason buyers include the fee is because they’re taking on the risk of receiving those future payments – the insurance company could go bankrupt, or inflation could devalue the purchasing power of those future funds.
So how does a purchasing company calculate your present value? They consider factors such as the total payment amount, the number of remaining payments, due date of payments, frequent (monthly, quarterly, yearly), number of payments sold, interest rate, whether it’s guaranteed or life contingent, and the annuity issuer.
Any online structured settlement calculator offers an estimate, not an exact quote. For more detailed information, get a free quote from multiple purchasing companies.
Options for selling
There are three ways you can sell your structured settlement payments.
Sell all your payments: This is when you sell all your future payments in exchange for a lump sum of cash.
Sell a set number of future payments: You can sell some of your future payments for a smaller lump sum.
Sell a portion of each payment: Only sell a percentage of some of your future payments so you still have some consistent income throughout the years ahead.
The selling process explained
The best first step in selling your structured settlement is to determine how much money you need. You should have an intended purpose for the funds. Once you have that number, here’s what you can expect to happen.
- Compare quotes from multiple purchasing companies: Shop around to compare multiple offers.
- Pick the best quote from a credible company: Choose the best one (including low discount rates) from a company that has positive customer reviews.
- Finalize paperwork and get court approval: Fill out all the requested paperwork. Then the company will schedule a court hearing where you’ll need to get a judge’s approval on the transaction.
- Get the funds: Choose how you want to receive funds from the transaction.
Before making any decisions, talk about your situation with a financial advisor or other professional.
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