News and Tips on structured settlement transfers.

It’s not a pleasant thought, but if you have a structured settlement, you may have wondered what would become of those payments if you should head to the Great Beyond. 

The short answer is, it depends on how your settlement was designed.

If your settlement is set up so that it pays only while you, the annuitant, is still alive, then there will be nothing for your beneficiaries if you should make an early exit.   Not surprisingly, this would be the structure of choice for defendants in a personal injury lawsuit, because it ends their liability if the annuitant dies.  However, as you might expect, plaintiffs usually want more flexibility than this.

Another option for a structured settlement is to have the payment stream be fixed over a certain period of time or a certain number of payments.  This may be called a “guaranteed period” or “period certain” because, even if the annuitant should die, the payments continue until the specified period comes to an end.  If the annuitant is no longer alive, the remaining payments go to his/her beneficiary, or his/her estate if no beneficiary has been specified. 

Yet another possibility is to structure the settlement to pay a “joint and survivor benefit.”  In this case, the payments go to the annuitant, but, in the event s/he dies, the remaining payments go to a specified “survivor.”  This would usually be someone like a spouse or child.  Like the guaranteed period, it ensures that the structured settlement will be paid in full, even if the annuitant does not live that long.

Finally, your structured settlement may contain a “commutation rider” which provides for a designated beneficiary to receive a discounted lump sum payment in lieu of the remaining payments if you should die.  Typically, the commutation rider will call for the beneficiary(ies) to get 90% of the remaining settlement if the annuitant dies; this is more than the beneficiary would likely get if s/he sold the payment stream to a structured settlement buyer. 

So, should you sell your structured settlement now in order to make more money for your beneficiaries?  Well, hopefully you and your lawyer had a long conversation about your anticipated needs before you even agreed to the settlement.  But, even so, selling it is a major decision.  If you should die, remaining payments made to your beneficiaries are generally tax-free.  It’s difficult to discipline yourself from spending the entire lump sum if you sell, and any interest you earn on the investment of the funds is taxable – not tax-free, like your structured settlement.

Hopefully, you will enjoy a nice long life with your structured settlement payments.  But take a look at your settlement agreement so that you understand what will happen if you’re no longer around.

How does the sale of your structured settlement work?  Here’s a quick summary of what you can expect.

First, find a buyer.  You can use www.quotemeaprice.com to get competing buyers to bid on your settlement.  You don’t have to sell your entire settlement; you can sell a portion or just a few of the payments you have coming to you. 

Check out the bids you get, paying attention to all the details.  You want the best lump sum, but watch out for any extra fees.  Do “due diligence” by checking out the reputations of the prospective buyers.  You can do this by going to the Better Business Bureau’s website and looking at what kinds of complaints, if any, have been submitted against the buyers.  If you see lots of complaints alleging that the companies changed the original deal, snuck in lots of fees, or didn’t pay the lump sum as promised, these should be red flags.  Also, beware any buyer who claims to be able to complete your structured settlement transaction in less than 45-60 days; all states have a legal process that must be followed, and it will take at least that long from start to finish.

Once you’ve picked a buyer, pay close attention to all of the contracts and paperwork you receive.  Look for any changes to the original offer, and check the fine print for additional fees.  If you don’t understand something, ask.  If the buyer doesn’t sufficiently answer your question, tells you not to worry about it, or starts pressuring you to sign, you should walk away.

Most states require structured settlement sellers to get legal and/or financial advice.  Make sure you find a lawyer who is independent – don’t take the buyer’s recommended experts or accept referrals from them – and who has handled structured settlement transactions before.  Specifically, the lawyer should evaluate whether the sale is in your best interest, and should make sure the buyer isn’t trying to pass on fees to you that state law says he has to pay.

The sale of your structured settlement will have to be approved by a judge, and you may even have to appear in court for this.  If the judge believes that the sale is not in your best interest, s/he can refuse to approve it, and you’ll have to start over again if you still want to sell.

Finally, you’ll have a “cooling off” period after the sale is approved before it is finalized.  This is your last chance to re-think the whole thing, and decide once and for all whether you truly want to sell.

Those ads sure are tempting, especially late at night when you’re tired and prone to worry about all of the needs you have.  Selling may seem like the right idea, but here are some good reasons to stick with what you have

A Structured Settlement is Stable Income.  One of the reasons structured settlements are so popular for settling personal injury lawsuits – and so popular with buyers looking to invest – is that there is virtually no risk of not receiving your payments.  Insurance companies invest the lawsuit proceeds in conservative investments designed to earn interest so they can pay your settlement as promised.  The structured settlement buyer is risking little more than his time and some attorney fees to draft and structure the sale.  Meanwhile you risk plenty if you let that settlement go.  How will you support yourself, especially if your injuries have left you unable to work?  How will you meet your expenses without the annuity?

The Sale Won’t Go as Planned.  Yes, the ads say you’ll get cash “now” or “fast,” but these are relative terms.  If you truly need your cash that fast, a structured settlement sale won’t help.  All states have laws governing structured settlement factoring transactions, and all of them take a minimum of 45-60 days to complete the entire transaction.  Some states can take months.  And there’s always a chance your deal will hit a roadblock:  misfiled paperwork, miscommunications, slow mail, etc.  Any of these can stretch out the approval process.  And remember that, even if all goes smoothly, a judge can nix the deal if s/he doesn’t think it’s in your best interest.

You Can’t Make up the Difference.  Your friends and family may tell you that you can certainly earn a better return than what the insurance company is putting toward your annuity.  They may be telling you that the insurance company isn’t an investment company, and doesn’t know what it’s doing.  You can beat that, they say.  Truth is, the folks that insurance companies have investing the funds usually are experts who deal in investments every single day.  You may see higher interest rates, but they are more risky and there’s a chance you could lose everything while chasing a few percentage points.  And don’t forget that, when you sell, the buyer pays you far less than you would have received over time.  They do this by discounting your annuity.  This discount rate covers the buyer’s costs and guarantees his profits.  If the discount rate is in the double digits, can you truly overcome that deficit with your investments?  Unless you’re the next Warren Buffett, it’s not likely.

If someone offered you a choice between $1,000 today, and $1,100 one year from now, which would you take?  Most people would take $1,000 today.  How is it, then, that money you have in your hand now is worth more than some future promise of more money?

There are a couple of reasons.  One is that the prices of goods and services may increase to the point that the future $1,100 won’t have the same buying power as today’s $1,000.  Another reason is that there is a risk that the promise of $1,100 in a year won’t come true. 

So, how does this concept apply to your structured settlement? 

If you are attempting to sell your structured settlement, you may have noticed that prospective buyers are offering you far less than the total amount of the payments you are trying to sell.  The buyers are using a discount rate to scale back the total amount of the scheduled payments to the amount they are willing to pay for them.  This is the time value of money in action.  Buyers use a discount rate as a way to compensate for the fact that they’ll have to wait for their money – they have to wait until your structured settlement pays out.  Buyers also want to be compensated for the expenses they’ll incur in the factoring transaction, their overhead, lost interest on the cash they’re giving away, and, of course, profit.

Meanwhile, the discount rate for you is essentially interest in reverse.  When you borrow money, you have to pay back the amount you borrowed, plus interest, right?  That interest rate compensates the lender for his expenses, the time that he has to wait to get his money back from you, and his inability to spend it or make money on it while you’re using it.  So, the discount rate is essentially “interest” that you’re paying for the privilege of not having to wait for your money. 

If this seems unfair, remember that you have the option of not selling your structured settlement.  Do you have a legitimate emergency and no other way to pay for it?  Or are you simply attracted to the siren song of quick cash?  Structured settlement buyers can charge discount rates in the double digits because they know that getting cash now, either because you need it or just want it, is a powerful incentive.  Before you sell, really give some thought to how important that cash is to you, and whether you really want to give up so much to get it now.