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?