Jan 04

A guest post on Structured Settlements, a topic I’ve not yet discussed - 

Structured settlements are basically a regular flow of compensation money that a person might be entitled to and receive after he wins a lawsuit, or after an accident or in any other forms of compensation. These bring in a steady flow of income monthly or annually over the lifetime of the benefactor with timely and guaranteed payments throughout life.

There are plenty of companies in the market right now that are interested in buying structured settlements. Especially after the fall of treasury bonds in the recent inflation, buying structured settlements is a very good investment option right now.

When can you consider selling your structured settlement?

Though such settlements provide a steady and regulated flow of income over a large span of time, sometimes there might raise circumstances where one is in immediate need of a large amount of money, instead of the smaller installments. In such cases a person might either consider taking out a loan. The other option available to him, provided he has a structured settlement to his account, is to sell it and get a lump sum of money instead of receiving controlled amounts in intervals.

Points to keep in mind while selling

  1. Discount Rates – Companies that buy structured settlements will keep a profit margin for themselves by asking for high discount rates. For example, suppose you have a settlement of total annuity of $ 100,000, with annual payments of $ 5,000 for next 20 years. If a company offers to buy it from you at a high discount rate of around 30%, then you would get paid $ 70,000, instead of the $ 88,000 that you would get if you went for a company that agrees to buy from you at a more reasonable discount rate of 12%. So it is very important to get quotes from multiple buyers before selling your annuity.

  2. Proper Legal Advice – The proceedings must take place under the supervision of a proper judge who will be able to assess the situation, while keeping in mind your financial status and your current need for the money. The selling has to be court approved. Also you need to get a good attorney to represent you, because otherwise, there are numerous fraudulent companies which might cheat you out of your settlement.

  3. Company Information – You must gather as much information as you can on the history and background of the company that you are considering and see whether it has ever gone bankrupt in the past. Also the payment should be made by its insurance company and not by the company itself, as in that way the company going bankrupt again will not affect your payment.

  4. Other factors – You should keep in mind that if the company is only providing you verbal offers and is being inflexible in its buying options, then in that case you need to forego that option. There should not be any situation where you feel coerced into making such a big decision like selling your structured settlement. Look around, judge the market and select the option that suits best your financial needs.

written by Joe \\ tags:

One Response to “Things to Remember While Dealing With Companies That Buy Structured Settlements”

  1. Steve Says:

    30% is (well, may be) a high discount rate, and 12% reasonable, but even if they are so, it’s only in the context of *that particular example*. Discount rate actually needs to be calculated in a way that takes into account how many years the annuity is over. This sounds complicated but it’s not. You can use the NPV formula in excel like so: NPV(0.04, 20, 5000) where 20 is the number of years, 5000 is the annual payment, and 0.04 is 4% and is an actual discount rate that “discounts” future money to account for inflation, risk of not receiving the future payment, etc. I suggest for simplicity sake to use 30-year mortgage rates.

    In the example, the $70k payment represents a fairly reasonable 3.67% discount rate (higher than expected inflation but lower than today’s mortgage rates); but the $88k payment is only a 1.25% discount rate, which is below inflation – if you think you’re going to hold out for a company that will give you that, well, good luck to you.

    I don’t see how point 3 applies. The company buying your annuity/structured settlement pays now; once you cash their check you don’t care if they go bankrupt. The company you need to be concerned about is the one paying out or guaranteeing your annuity.

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