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Selling your structured settlement is not a decision that should be taken lightly. You’re effectively trading long-term financial security for a smaller lump sum payment, and since the settlement is likely tied to a personal injury that might be keeping you out of work, there’s a fair amount of future uncertainty involved here.
Does your need for immediate cash outweigh the long-term financial stability provided by the settlement payments? Keep reading to learn when selling your settlement makes sense and when it doesn’t.
When Does Selling a Structured Settlement Make Sense?
A structured settlement is a type of settlement that’s paid out in regular, periodic payments instead of a single, large lump sum. An annuity is often used to provide these payments, and the payments sometimes last for the victim’s lifetime.
While you’d normally have to wait years before you see the full benefit of the settlement, selling these structured payments allows you to get an immediate lump sum that’s less than the total value of your future payments. Because you’re getting less money out of it, it’s not always a good idea, but there are a few scenarios in which selling might make sense for you.
Urgent Financial Needs
Many annuitants look into selling their structured settlements when faced with emergency financial needs, such as foreclosures, imminent bankruptcy, and medical bills not covered by insurance.
- Pros: You get immediate access to cash and are able to pay unexpected bills. This option can also help you avoid the high-interest debt that comes with putting these expenses on a credit card.
- Cons: There are other ways to cover such immediate needs (such as social programs or payment plans) that don’t come with the cost of losing the full amount of your settlement over time.
Investment Opportunities
In some cases, you might have an investment opportunity come along and need cash to invest. This might be starting or purchasing a business, buying a home, or even investing in yourself via education.
However, you must carefully consider the expected return on your investment to determine whether selling your structured settlement would be worth it.
- Pros: You have the potential to grow your future income and make even more than you would by keeping your settlement payments, leading to even better financial stability in the future.
- Cons: Any investment is a risk; if it doesn’t pay off, you could end up losing some or all of your lump sum — as well as your future payments.
Eliminating High-Interest Debt
High-interest debt like credit cards and payday loans can be a huge financial drain. Selling your structured settlement payments could be a good option for paying off this type of debt and getting a fresh financial start.
- Pros: Eliminating the monthly payments that come with debt would increase your monthly cash flow and help you better manage your short-term finances.
- Cons: If you don’t properly manage your money moving forward, you might run into the same issue that saddled you with high-interest debt to begin with (overspending, gambling, etc.), and you might no longer have access to your settlement payments if you previously sold them all.
Significant Change in Life Circumstances
Sometimes, a change in your life circumstances beyond your control might demand immediate financial attention. Some common examples include divorce, relocation to a more expensive area, or sudden changes with a dependent.
- Pros: Having access to more funds to cover unexpected needs can help you avoid stress, high-interest debt, and other negative consequences.
- Cons: Like with other situations, the biggest drawback here is that you could lose your future financial stability and guaranteed income. This could lead to financial hardships in the long term.
When Selling Your Structured Settlement Payments Might Not Be Right
There are some situations where selling your future stability simply doesn’t make sense. In these cases, there’s typically a better way to solve your problems, and the sale may not even get approved by a judge anyway.
No Immediate Financial Need
If you don’t have any immediate financial need, selling your structured settlement payments probably doesn’t make sense. Perhaps your payments already comfortably cover your living expenses each month, but you simply want some additional cash for some discretionary spending. In this case, it’s not worth giving up your future payments and financial security just to have additional money in your hands.
Poor Present Value
Remember that the company that buys your future payments will apply a discount rate in order to determine the present value of those payments. Depending on interest rates and other market conditions, you might end up receiving an amount that is significantly less than the total of your future payments. If the present lump sum value is low, it might not be the best time to sell, and keeping your regular payments could lead to a much higher total payout over time.
Risk of Money Mismanagement
If you have a history of managing your finances poorly, you likely should hold on to your settlement payments. Selling your payments might give you a lump sum now, but bad habits like impulsive spending would whittle away at this money very quickly. Keeping your settlement payments in place forces you to be more disciplined with your money and helps protect your financial future.
Negative Tax or Benefit Program Implications
By taking a lump sum now, you could affect your ability (or even your dependents’ ability) to participate in certain public assistance programs. Additionally, you could lose some of the tax advantages of the structured settlement payments, depending on how you use the money.
How Selling a Structured Settlement Works
If you do decide that selling your structured settlement is the right move, you should be aware of what it entails. Just be aware that this is the short version, and you should speak to a financial planner and/or attorney if you want to learn more.
After talking it over with a qualified professional, you’ll be put in contact with a company that will make an offer on your settlement. Again, this is a discount rate that will translate to a lower lump sum than if you had waited out the terms of the settlement. The discount rate usually varies from 10% to 20%, depending on interest rates, fees, and other market conditions.
Then, you must request a judge’s approval to sell your payments. The court will review several key pieces of information, such as your current living expenses, future financial needs, and life expectancy. When reviewing this evidence, this judge will determine whether the sale is in your best interests — if it isn’t, it likely won’t get approved.
The entire process usually takes 45 to 90 days, although some sales may take longer if there are issues in getting the court’s approval.
Making the Decision of Whether to Sell Your Structured Settlement Payments
Before you decide whether to sell your structured settlement payments, you should ask yourself some important questions:
- Do I have an immediate financial need?
- Have I explored all my options, such as a partial sale or even a personal loan?
- Do I have a plan for my long-term financial stability?
- Would all the money from my lump sum be gone within a year or two?
- Have I gotten independent advice from a professional?
Remember that some companies may give you higher offers than others, so it’s important to obtain quotes from several different parties before making your final decision. It’s also critical to work with a consultative company like Strategic Capital, which will help you determine how much you actually need and won’t just push you into a total sale. Instead, they’ll walk you through all your options (such as a partial sale or percentage sale) in order to fulfill your immediate financial needs while still leaving something behind to protect your future.
There is no one-size-fits-all approach when it comes to making this important decision. The ultimate goal is to be able to handle your immediate needs while also having financial stability in the future.