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If you are considering selling your structured settlement payments, chances are that you may have an immediate financial need for a lump sum. However, before you sell, it is important that you understand all the costs associated with it. Not only will you have to deal with the discount rate, but you might also face court costs, legal fees, and even administrative costs.
Sellers deserve to fully understand all the costs associated with these transactions. Dive into all the details below to learn how much it truly costs to sell a structured settlement, including the typical ranges and how to avoid overpaying.
What Is the Discount Rate?
The discount rate is the largest cost you will face when selling a structured settlement. This is the percentage used to calculate the present value of your future payments. Since the buyer is assuming some risk and must wait on future payments, they will apply a discount rate to the present lump sum they are willing to pay you.
Buyers apply a discount rate in order to compensate for:
- Future inflation risk
- Time value of money
- Business overhead
- Potential credit risk
To better understand how the discount rate works, it can be helpful to look at an example. Suppose that you receive structured settlement payments of $2,000 per month for 10 years. This means that the total value of your payments would be $240,000. However, imagine that a buyer offers you a lump sum of $190,000. The $50,000 difference would be considered the discount rate, which would equal about 21% in this case.
There are several factors that can affect the discount rate that may be applied in your situation. Some of the most common factors that affect the rate are:
- Length of your payments
- Amount of your payments
- Urgency of your need
- Interest rate market
- Strength of your annuity company
While there is no one-size-fits-all formula for calculating the discount rate, it can be helpful to look at some averages. Understanding common ranges for the rate can help you understand whether the costs associated with the sale of your settlement are too high. Average discount rates usually fall somewhere between 9% to 18%, with:
- Strong offers falling between 9% to 13%
- Average offers ranging from 12% to 16%
- High discount rates ranging from 16% to 20%
A discount rate above 20% is usually a red flag. This usually signals some unusual circumstances. It could mean that the buyer is trying to take advantage of you or that there are some unique circumstances in your situation that pose a higher risk. Either way, it is wise to shop around in order to find the best offer.
Court Costs and Legal Fees
Structured settlements are legally protected, and selling your settlement requires approval from the court. The court will examine all the evidence of your situation, such as:
- Your immediate financial need
- Your long-term financial needs
- The discount rate or sale offer
- Other relevant information
The court must ensure that the sale of your structured settlement is in your best interest. If they find that the sale is not in your best interest, they might not approve it. Although this might seem like somewhat of a hassle, this process is in place to protect you against predatory transactions.
Since court approval is required, you may encounter some additional costs due to this process. This can include court filing fees, court processing costs, and legal fees. These fees can range anywhere from a few hundred dollars to $1,000 or more, depending on the complexity of the transaction and the amount of time required to obtain the court’s approval.
One important thing to understand is that many buyers pay these costs. You, as the seller, are not likely to be required to pay for these costs directly, but these costs are figured into the discount rate applied to your offer. If a seller is asking you to pay court costs directly, this may be a red flag.
Administrative and Processing Costs
Structured settlement buyers incur many administrative costs in order to underwrite and complete these sales. The expenses of administration often include:
- Underwriting
- Coordinating with the annuity company
- Compliance reviews
- Identity and payment verification processes
- Creating and maintaining full documentation
As with court costs, most legitimate companies do not charge these fees as a separate line item. Instead, they are factored into the discount rate when you are given the lump sum offer. Beware of companies that charge separate application fees, administrative fees, or processing fees. Those companies may be looking to take advantage of you and your financial need.
Broker Fees
When you decide to sell your structured settlement, the type of company that you use can have an effect on the total cost. You may see lower costs when using a direct buyer versus going through a broker. Direct buyers use their own capital to purchase your settlement, and there is no middleman.
Brokers, however, act as intermediaries and shop your deal to several potential buyers. The drawback, though, is that the broker will take a commission. Commissions on these sales often range anywhere from 1% to 5% of the settlement value, but transparency can sometimes be an issue.
You might not see the broker fee listed separately on your final documentation. Instead, you might simply see a higher discount rate, which in turn, leads to a lower lump sum payment. This is another reason why it is important to shop around and get multiple quotes or offers prior to making your final decision.
Common Myths About the Cost of Selling Your Structured Settlement
There are several common myths about the cost of selling a structured settlement. Unfortunately, these myths lead to the spread of bad information and uninformed sellers. Some common myths that can be debunked are:
Myth #1: There is a specific fee percentage associated with the sale of a structured settlement.
There is no specific fee percentage or calculation that is used in all cases. Instead, the costs associated with the sale are usually reflected in the discount rate based on the specific factors associated with your situation.
Myth #2: The buyer keeps all the difference as profit.
It is definitely true that the buyer is going to offer you a lower value than the total of your future payments. However, they are assuming some risk, and they also must wait for those payments to come in (sometimes years).
Myth #3: Court costs and legal fees are expensive.
The truth is that court costs and legal fees in these situations are usually very minor compared to the overall discount rate. Most sellers do not pay these fees directly, but they are simply factored into the total offer.
Myth #4: All companies will make me the same offer based on a simple formula.
This myth could not be further from the truth. All companies are different, and their offers will also be different. You may be surprised to learn just how much money you could save by shopping around with different companies.
Additional Red Flags and Warning Signs
A few red flags have already been discussed, especially in terms of very high discount rates or additional fees and costs. But there are also a few other red flags and warning signs that you should watch for. One of the biggest red flags is when a company uses high pressure tactics. Be very leery if a company is telling you:
- “Your offer expires today”
- “You must sign immediately”
- “There is no time to shop around”
These are common tactics used to pressure you into a quick sale. The company likely knows that they do not have the best offer, so they will attempt to pressure you into a deal before you get a chance to talk to other companies.
This is one reason why it is so important to use a reputable company like Strategic Capital. They are trusted by both lawyers and consultants in the industry, and they will work with annuitants to figure out the right solution instead of pressuring you into a quick sale. Instead of pushing for a complete “cash now” sale, they can help you secure a sale that covers your immediate financial need while still protecting your financial future.
You should also watch out for companies promising a “no cost” sale or those that lack transparency. All structured settlement sales have costs built into the discount rate, so a true “no cost” sale does not exist. Additionally, companies that refuse to be fully transparent with their cost breakdown or that won’t explain their discount rate are probably not the best choice to do business with.
Tips for Minimizing Your Costs
Remember that there is no single formula used to calculate the costs of selling your structured settlement, so using these tips can save you some serious cash:
- Get at least three to five different quotes
- Only deal with reputable companies, like Strategic Capital
- Avoid pressure tactics
- Explore a partial sale if possible
Finally, get professional advice if you have questions or are confused. Getting help from a financial professional or lawyer could end up saving you thousands of dollars, so it is always wise to seek guidance and advice.
Make a Smarter Decision By Understanding the True Cost of Selling Your Structured Settlement
The main cost associated with selling your structured settlement is the discount rate, and that often ranges from 9% to 18% in most cases. While some other fees and costs may be taken into consideration when setting the discount rate, sellers do not usually pay these additional costs directly. Watch for red flags and avoid companies that charge separate administration or application fees and also avoid the ones that try to pressure you into a quick sale. Be sure to shop around to get the best offer, and having an understanding of how all these costs affect your final payout can help you make an informed decision and move forward with confidence.