Structured Settlements - How They Work

Structured Settlements - How They Work

A structured settlement is a type of settlement normally used in accident and medical negligence claims as an alternative to the payment of a lump sum by the defendant to the claimant.

A structured settlement may have three components. The first is an interim payment (or payments), which is normally set to cover costs and expenses met by the claimant before settlement. This would include medical and legal costs up to the date of the settlement of the claim. The second component is a series of payments, normally met by an annuity, payable in regular instalments in payment of damages. The annuity is normally set up to increase with inflation or at a fixed rate designed to approximate the expected rate of inflation. Lastly, there is a further lump sum to cover contingencies which may not be met by the annuity payment.

The most difficult aspect of the structured settlement arrangements in practice is that relating to the annuity.

How to Choose a Structured Settlement Company

1. Compare Quotes

First and foremost, source quotes from several reputable companies, as structured settlement buyout offers can vary. Ask about the discount rate as well as the fees incurred for getting court approval, processing the sale, and more.

Some companies may offer the chance to speak with an independent professional Advisor to provide guidance on what the liquidated funds could be used for, as a percentage of annuitants today are refinancing their settlement into other investments.

Can you negotiate a structured settlement buyout offer?

Several structured settlement buyout companies offer a best price guarantee where they'll try to beat a competitor's offer. This is why it's important to shop around and source multiple quotes.

When asked whether you can negotiate your offer, a District Settlement Finance representative told us, “Educate yourself on the sale process, what it entails, what a discount rate is, and how your payout will differ by payment structure when it comes time to fund your transaction. There are only a few credible buyers of structure settlement payments, so it shouldn't take long to learn how much your payments are worth.”

3. Prioritize Customer Service

Selling a structured settlement is a big decision so it's important to find a company that is available to talk to when you need help. Ask for additional contact methods you can leverage during and outside regular office hours, such as cell phone, email, live chat, and more.

If the company you're working with provides a high level of support, then they will likely also have a well-defined approval process when you go before a judge.

4. Ask About the Denial Rate

Analyzing the percentage of proposed settlement purchases declined by a judge, and the total dollars purchased to date are important figures for gauging a company's reputation and success rate.

It's certainly wise to inquire about these figures—and we are weary of companies who refuse to answer—but you must also remember that many factors can affect the outcome of your case. Each and every deal that gets presented to a judge is unique and should be treated as such.

5. Prepare to Wait for Court Approval

It's important to know that when it's time to sell your settlement payments you will need to go before a judge who will ask you about your requested transfer and determine whether cashing out your settlement is in your best interest.

The court approval process can take a few months from start to finish, depending on the jurisdiction. To begin the process, you'll sign a series of paperwork before the company files a petition with the court to approve your settlement transfer.

Who Can Benefit from Selling a Structured Settlement?

Most commonly, people choose to sell a structured settlement to cover an immediate financial need, such as:

• Medical emergencies
• Emergency home repairs or aging-in-place renovations
• Funding a retirement account
• The cost of college tuition
• Purchase of a home
• Pay off child support
• Pay off tax liability and government debt
• Start a business

Typical Payouts for Structured Settlements

Structured settlements involve periodic payments to an individual, often as a result of a lawsuit settlement or insurance claim. When these settlements are sold for a lump sum, the purchasing company will offer you a price based on the future value of your payments by factoring in inflation over time.

In other words, $10,000 goes much further than today than it will be 20 years from now. So, if you want to sell a payment you're due to receive next year, the purchasing company will buy it for a price they think it will be worth next year—not today.

Discount rates: Every structured settlement buyout company will calculate a discount rate for your payments, which is used to discount future payments to their present value determined by time, value of money, and risk. Common discount rates for structured settlements typically range from 8% to 18%. The higher the discount rate, the lower the present value or lump sum payout for the same future value. District Settlement Finance has the lowest discount rate, according to our research.

After factoring in discount rates and other fees, you'll walk away with less money in the long run, but you'll gain access to fast cash you can use for other expenses.

Considerations Before Cashing Out a Structured Settlement

It is extremely important that you know selling your structured settlement payments is not a financial decision you should take lightly or make quickly.

However, there are instances where selling could make sense if you have significant debts. We recommend consulting your financial advisor to help you compare your debt's interest rate to the rate the buyout company proposes.

Pros and Cons of Selling a Structured Settlement

Pros:

• Liquidating your settlement can help cover significant expenses
• Faster access to a lump sum of cash
• Investing the funds may yield higher returns than interest on periodic payments
• Paying off debts will help with your credit score

Cons:

• The payments are being sold at a discount, so you'll lose part of your settlement
• It takes anywhere from 30 to 60 days to receive your cash
• Lump-sum payments eliminate the possibility of steady and reliable income streams over time

Alternatives to Selling a Structured Settlement

People often choose to sell some or all of their structured settlement to access a lump sum of money to help cover major expenses. However, those in need of fast cash can leverage other options, such as:

• Selling a life insurance policy
• Cashing in a pension or retirement fund
• Credit counseling, debt management, or loan consolidation
• Accessing your home equity with a cash-out refinance mortgage or home equity line of credit
• Liquidating a stock portfolio
• Selling annuities that you may own or have inherited

Discuss with a finance professional or credit counselor before deciding whether selling your settlement payments is in your best long-term interest. Sometimes, getting out of a financial hole in the short term can give you the opportunity to be successful in the long term; every situation is unique. Only you can decide whether selling your payments is in your best interest.

FAQs About Structured Settlements

Will I owe taxes if I sell my structured settlement?

Generally, lump-sum payments from selling a structured settlement are tax-free. However, tax implications can vary based on individual circumstances and the nature of the settlement. For this reason, it's wise to consult your CPA or tax attorney on the implications of selling your payments.

Can I cancel a structured settlement buyout if I change my mind?

Cancellation policies vary by company and jurisdiction. Some states have a mandatory cooling-off period, allowing you to cancel within a specific time frame. After you sign, there is a rescission period that varies by state; it's nearly impossible to cancel once the judge has approved the sale. However, the process from signing to your court date is long enough that you have time to decide if you want to move forward.

Can I sell a portion of my structured settlement?

Yes, you can sell all, a portion of your future payments, or a specific dollar amount, depending on your needs and the buyer's terms. Some insurance companies only allow a certain amount of splits when selling, and there may be a servicer of the payments that sends out the monthly, quarterly, or yearly payments.

Why do I need court approval to sell my settlement?

Federal and state laws mandate that you get court approval to ensure the sale is in your best interest and to protect you from unfair terms. There are also state mandates on discount rates that can be applied to a transaction.

What type of income can I sell to a structured settlement company?

Many companies purchase structured settlements, annuity payments, and lottery payments. You can also sell casino winnings and jackpots, though they aren't as common. Each type of income may have different regulations and market rates. The approval process may also vary slightly by payment type.