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1. There are always both pros and cons
When you cash out your structured settlement, you access immediate cash that can help cover a financial emergency. On the flip side, however, you lose some or all your long-term payment stream that provides financial security. Additionally, you’ll lose some cash due to the discount rate, which is a percentage of your annuity value charged by the factoring company.
2. You have options
You don’t have to sell all your structured settlement payments. You have a few different options that let you tap into a lump sum of cash fast, without having to give up all of your future payments. While you can sell all your payments, instead consider selling a certain number of payments or a percentage of future payments. That gives you a balance between getting cash now and still receiving periodic payments later.
3. There’s a cost to cash out
Factoring companies charge a fee when you cash in part or all your structured settlement. It’s called a discount rate, which is a percentage deducted from the remaining value of your payments. Discount rates range from 6% to 19% and can go even higher — although it’s possible to negotiate a lower rate. You should also compare free quotes from multiple companies to ensure you don’t overpay for funding.
4. Keep an eye out for red flags
When dealing with factoring companies, be careful with buyers that do any of the following:
- Charge a high discount rate
- Push you to sell more structured settlement payments than what you need
- Don’t advertise a physical address
- Rarely answer phone calls
- Poor customer service with a confusing sales process
These are considered red flags.
5. Shop around for multiple offers
Talk to different factoring companies and get multiple quotes to compare. You should be able to get a free, no obligation quote that includes your discount rate. Focus on credible companies by checking out third party review websites to see what other customers have experienced when selling their periodic payments.
Also make sure the company works with your type of structured settlement payment. Most people who are awarded a structured settlement from an insurance company have won a lawsuit as a plaintiff. Cases usually involve personal injury, wrongful death, or medical malpractice. Make sure the company you choose to work with purchases your type of settlement.
6. The court hearing and judge approval process takes time
The full process takes one to three months to complete. Court approval is required in order to transfer the rights of structured settlement to the buyer. The goal is to protect your best interests and make sure the purchase terms aren’t predatory. The judge reviews your living expenses, life expectancy and future financial needs. You’ll need a good reason for cashing out your structured settlement, which could include paying bills, paying off debt, paying mortgage, starting a business, buying a car, making tuition payments, or taking on investment opportunities. Luxury vacations or other similar reasons may not be approved.
7. Tax implications are usually minimal
Because structured settlements are not considered income by the IRS, they are not subject to income tax. In other words, any lump sum you receive is tax free. Do consult with a tax or financial professional to confirm the details of your specific situation and ask any questions you have about the process.
Final thoughts
Cashing your structured settlement instead of waiting for all your future payments may be a good choice if you have urgent financial needs. Weigh the pros and cons and consult with a financial advisor if you’re not sure of how much to sell. It’s always best practice to shop around and get quotes from more than one settlement buyer. Then you’ll feel confident choosing a buyer that gives you the best quote and demonstrates credibility.