Structured Settlement Facts You Should Know

Structured Settlement Facts You Should Know January 25, 2012

You’ve seen the commercials, “Trade your structured settlement for a lump sum payment!”. One popular advertisement in my area says, “Call if you need cash now!”.  The ads are even more annoying than cash advance companies.

For those that don’t know, a structured settlement is a financial or (more often) insurance arrangement that pays out a settlement over the course of years (often 10 or more). Most people choose this option because their lawyer told them it would give them more money over the long-term than the lump sum and that it would save taxes. And while this is usually (but not always) true in bare numbers, it’s still not a great option.

Enough people have chosen to do structured settlements that law firms are offering to buy them in exchange for a lump sum payment. They target people going through tough times (“I need cash now”) and those who can’t do math (“I just want money now”).

How Structured Settlements Works

Let’s start out looking at a possible structured settlement. You win a significant amount of money in a lawsuit and after all is said and done you have $100,000 dollars coming to you. Your lawyer points out you’ll save a bundle on taxes if you put it into a 10-year annuity. You agree and receive monthly payments for 10 years totaling $100,000.

You can set these up however you want, but we’ll use this as an example.

So you’re making less than a grand a month through the annuity and aren’t doing so well financially. Something comes up and you need money; maybe it’s a medical bill, or a screaming debt collector, or something else. Whatever it is, that settlement money is starting to look really nice.

Unfortunately, you can’t touch it. Once signed up for the structured settlement, you’re stuck with it.

But wait! There’s another option. You can sell it in to a company and get a lump sum payment.

Selling A Structured Settlement

Going off the example above, let’s say you’ve had the settlement for a year and there is $90,000 left when suddenly you have a huge bill that needs to get paid. You find a company that wants to buy it off you and allow them to “bid” on your settlement. Here are some things that you need to consider:

  • Paying Taxes. Structured settlements protect you from paying taxes – that’s the main reason people like them. When you sell them for a lump sum, you lose that tax relief and have to pay significant taxes on the money.
  • They Want Profits. You may have $90,000 coming, but they’re not buying your settlement to help you, they’re doing it to make a profit. It’s likely your highest bid won’t be more than $50,000 dollars. That’s a significant loss.

Combining taxes and the low payments, you may find yourself with as little as $35,000 when all is said and done – a 62% loss.

If I offered to loan you $35,000 dollars at 62% interest over 9 years, you would laugh in my face! But people sell structured settlements all the time.

Should You Sell?

If you think you’ll need a lump sum in the future, don’t take a structured settlement. It’s not a great option to begin with and you can likely do more with the money if you take it now.

For those who do take structured settlements, don’t sell them. No matter how broke you are, or what situation you’re in, it’s likely you have other options. Selling may feel like it’s helping now, but it’s really stealing your future.

Have you know someone who has taken a structured settlement?  Did they sell it or stick with the payments?

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What Are Your Thoughts?leave a comment
  • Knowing the facts behind both of these options will help people make wiser decisions. Good job explaining how easy it is to lose without even realizing.

  • Mr. Humprey is absolutely right. There are many companies out there preying on folks who find themselves in dire financial need, and take advantage of that by offering them a low lump sum amount for their structured settlement. The bottom line is, the decision to sell a structured settlement should also be the last resort, and considered only after every other conceivable option is pondered. By owning a structure, you own an asset. And, your plans for the money will be important in determining whether you really need it, and whether you are willing to trade the benefit of long-term stability for the power to use the money now for a defined purpose. That said, companies like Vantage Capital Consultants do exist to offer very fair rates if no other solution is found. Vantage has talked many people out of selling, but prides itself on quality, fairness and service if needed.

    • Yeah, but as you said, I would hope they’ve exhausted every possible resource before taking such a hit.

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  • Wonderful blog! I found it while searching on Yahoo News. Do you have any suggestions on how to get listed in Yahoo News? I’ve been trying for a while but I never seem to get there! Appreciate it

  • You’ll find number of annuitized repayment streams one could possibly carry nowadays : a proprietor financed mortgage loan take note, a sweepstakes pay out, various insurance plan annuities, and so on. Considering that …trusted structured settlement broker

  • While you are correct in pointing out that it is not a good financial idea to sell a structured settlement, I do need to comment on one error in your article. The proceeds from the sale of a structured settlement on the secondary market are not taxable to the seller of the payments pursuant to 26USC5891, a Federal Statute enacted in early 2002. That being said, the seller of a structured settlement is taking a haircut on the value of their asset as the buyer is applying a discount rate (interest rate) which exceeds the rate of growth of the asset if the person kept it. Therefore, the buyer is not willing to offer the seller as much as the seller originally paid for the annuity.

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  • Alyssa

    is it possible someone can access my structured settlement money without my insurance company being notified of the transaction?

    • Alyssa, I am not a lawyer and I would strongly suggest you speak to one about your question.

      God Bless!

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  • Definitely most of the people like to sell a structured settlement because it protect from paying taxes. And also for a lump sum, you lose that tax and have to pay major taxes on the money.