What is a structured settlement?
A structured settlement is awarded after successfully winning a lawsuit as a plaintiff. The defendant’s insurance company sends you a monthly payment to cash in for a set number of years. This gives you a steady stream of income that can help give you a sense of financial security. On top of that, structured settlements are tax-free, meaning you don’t have to pay income tax.
The drawback is that you don’t have a lot of flexibility when your settlement funds trickle in over a period of several years. If you need access to a lump sum of cash in the event of an emergency, you can’t tap into that money unless you decide to sell your payments. And that comes with a cost because any purchasing company will apply a discount rate that reduces the value of your settlement.
What is the discount rate?
Here’s how the discount rate works. Most purchasing companies deduct anywhere from 9% to 18% of the future value of the settlement (and it could be even higher). It’s supposed to cover the buyer’s risk in waiting for those future payments. It also covers the cost of inflation, which reduces the value of those future payments.
There are several factors that impact the buyout percentage you’ll lose when selling your settlement payments. The present value is determined by the outstanding amount from the payments, how many remaining payments, payment due dates, frequency, any previously sold payments, rate, whether payments are guaranteed, and the issuer of the settlement payment.
3 Ways To Sell Your Structured Settlement
Selling your structured settlement isn’t an all-or-nothing decision. You have quite a bit of flexibility and can choose to sell just a portion of your future payments. Here are three ways you can structure the sale.
Full sale: A full sale is when you sell all future payments to a purchasing company. You won’t receive any more payments from your structured settlement moving forward.
Some of your full future payments: Another option is to sell a certain number of your future payments. You won’t receive your structured settlement income during that time, but you’ll get part of the lump sum instead. Once the transaction period is over, you’ll resume payments again.
A percentage of each future payment: Instead of selling the entire settlement amount (either monthly or annually), you can sell a percentage. For instance, say you receive $2,000 a month and sell 50% of your future payments. You’ll receive a lump sum as well as $1,000 per month moving forward.
How the selling process works
Before you decide to sell your structured settlement get a free quote on selling your structured settlement, calculate the amount of how much cash you think you need. It’s better not to sell the whole thing just because you can; instead, keep the rest to serve as consistent income for the years ahead.
With that number in mind, here’s how the process works.
- Shop around and get quotes from different buyers: Not all purchasing companies are the same. Compare discount rates and any other fees.
- Choose a reputable company with a good quote: Once you find a company and a quote you like, you’re ready to move forward.
- 3. Complete documents and receive approval from court: After you submit your paperwork, a court hearing is required for a judge to confirm the transaction isn’t predatory.
- Receive your money: After court approval, you’ll receive your funds.
Because court approval is legally required, selling your structured settlement can take between one and three months. It may seem like a long time, but the process is meant to protect you.