Have you ever heard of someone being awarded a large amount of money (from a lawsuit, lottery, etc) and wondered if they receive it all at once?
Chances are … they usually don’t.
Most of the time, the payment is broken up into smaller payments over a fixed duration of time. So for example, instead of receiving $500,000 all at once from a lawsuit, the plaintiff may receive $2,000 each month for the next 30 years.
Putting it all together, this type of payment is called a structured settlement.
Investopedia defines a structured settlement as:
While we often focus on building wealth for the long-term, it’s important to look at things from both sides of the fence. Therefore, I recognize that there may be some situations where a person may say I want to sell my structured settlement. Here’s a few that come to mind:
Possible Reasons Why You May Want to Sell Your Structured Settlement:
1) Payoff your debt. If you’ve already got a lot of high-interest debt, then chipping away at with regular small payments may not make as much sense as using the opportunity to pay it all off at once.
2) You need the money for upcoming excessive bill payments. If the structured settlement is the result of a lawsuit where there will be mounting medical bills, then having cash on hand may be necessary to prevent those bills from turning into debt.
3) You want to invest or try for a better rate of return. Usually the terms of a structured settlement cannot be altered. Therefore if the rate used to calculate the payment is low, you may think to yourself I want to sell my structured settlement and try for a better return with stocks, mutual funds, etc. Or perhaps you may want to invest in your own business!
4) You’re planning a large upcoming purchase. A house, car, wedding, etc.
5) College. If the kids are becoming of age and you don’t want them to have to deal with student loan debt, a lump sum payment may help to finance their education.
Before You Sell Your Structured Settlement, Do the Following:
Just like any investment, you should understand what it is you may be getting yourself into before you do it. The sale of a structured settlement is no different. And because of the magnitude of how much money is on the table, it is not a decision to be taken lightly.
First things first, understand that you will not get the full value of your settlement. The company making the offer is doing so to profit from it and to provide you the convenience of having access to the money all at once. Therefore you can expect to receive lots of different offers. Not only should you seek multiple quotes to make sure you get the best offer, but also take the time to understand the math behind what you’re presently receiving. You may say to yourself I don’t want to sell my structured settlement if the offer doesn’t compare to what you plan to receive over the long haul.
The other thing you may want to do is consult an attorney or lawyer. A professional who deals with these kinds of transactions can help you to avoid scrupulous offers. In addition, you should know that some places do not allow you to sell your structured settlement. A professional can help you to know if your state is one of them.
Perhaps the biggest benefit to using a professional will be in dealing with the tax consequences. One of the reasons why your settlement was annuitized in the first place is because its tax benefits. Now that it is being sold in exchange for a lump sum, the government will want their cut of the transaction. A good professional will be able to guide you through the process and help you understand the implications of the transaction.
Image courtesy of scottchan / FreeDigitalPhotos.net
Structured settlements can be a bit confusing at first, but once you look into them it really isn’t all that bad.
I agree Glen. I can see why there is a market for these types of products.
Nice contest and good luck to all who enter. I personally would cash in on a settlement provided i found a decent settlement. I would rather be in charge of putting the money to work for me.
If the terms of the settlement were not really that great, I could totally see why cashing out would have its benefits. Especially if you’re financially savvy – for sure you could potentially do a better job.
Thanks for co-hosting!
Same to you!
Apparently, structured settlement is a big business. Indeed, you have to think about tax consequences, if amount is large.