Selling Structured Settlement: Everything About It
Selling Structured Settlement often come from lawsuits involving personal injury, wrongful death, or medical malpractice. They’re designed to provide long-term monthly payments, which are typically free from U.S. federal income tax. Sometimes these monthly payments can’t cover your financial needs. In this case, you can sell some of or all your future payments. Here’s how it works.
Process of Selling Settlement Payments
Here’s what to expect when selling your structured settlement.
- Get Quotes: Start by obtaining quotes from multiple factoring companies. Most companies offer free, no obligation quotes over the phone in minutes. It’s important that you clearly understand how much you’ll receive and how quickly you’ll get your funds.
- Compare Options to Find the Best Quote: Choose a quote with a low discount rate from a company that demonstrates credibility. This involves answering your questions and providing you with multiple buyout options that are tailored to your specific financial needs.
- Receive Court Approval: Once you accept and sign the offer, the buyer will arrange a court date. This is for your protection. A judge must approve the transaction after verifying it’s in your best financial interest. Based on state laws and the buyer’s policies, you may be required to attend the court hearing, or your buyer may be able to represent you.
- Access Your Funds: The buyer will inform your insurance company of the sale and coordinate the annuity transfer. Then you’ll receive your funds.
Know Your Selling Options
You have three options when selling your structured settlement: a full sale, selling a specific number of payments, and selling a percentage of each payment. Here’s how each one works.
Full sale: If you sell your full settlement, you’ll receive more cash up-front. However, you’ll receive no future payments, and you could spend the money poorly.
Partial sale: With a partial structured settlement sale, you’ll sell your payments for a set period. Once that period ends, you’ll resume receiving payments, leaving some long-term financial security.
Percentage of monthly payments: You can also sell a percentage of your monthly payments. For instance, you may sell 50% of each payment for the next five years.
Before choosing a payment structure, plan when and how you’ll spend the funds.
Common Reasons to Sell Structured Settlements
The terms of a structured settlement are naturally limiting, with the recipient entitled to payments on a strict schedule. People often choose to sell their structured settlement to meet urgent financial needs or take advantage of opportunities.
Common reasons to sell structured settlement payments include:
- Buying a home
- Buying a car
- Financing education
- Paying off debt
- Paying medical bills
- Investing in a business
Companies that purchase structured settlement payments, known as factoring companies, can provide you with the cash you need in exchange for your remaining payments.
When you transfer your settlement payments, the buyer will always offer a price less than the total remaining value. Factoring companies use a formula to determine their offer based on a value called the discount rate.
Understand the Discount Rate
When looking at quotes from potential buyers of your structured settlement, you want to keep an eye out for a LOW discount rate!
The discount rate represents the annual return the factoring company requires to make it worth giving you cash up-front. Buyers primarily base their discount rates on their expectations for future interest rates. The higher the discount rate, the less money they’ll pay for your structured settlement payments.
Some factoring companies charge additional fees as well, so the discount rate isn’t the only factor in how much you’ll receive. These fixed fees mean it’s usually best to sell structured settlement payments only once, rather than making many small partial sales.
Discount rates vary among structured settlement buyers, but there is always a price for quick cash. Most companies use a discount rate between 9% and 18%, but some use an even higher rate.
Qualifications of a Good Buyer
When choosing a buyer for your settlement payments, make sure they meet the following criteria:
- Strong industry experience
- Professional and transparent customer service, without being pushy
- Few negative reviews on third-party rating websites
- Free, non-obligatory quote
- No hidden fees
- Multiple buyout options available
- Legal process and paperwork assistance
- Competitive discount rate and fees
Pros and Cons of Selling Your Structured Settlement
All financial decisions come with advantages and drawbacks. Consider the following when selling your structured settlement annuity:
- Receive cash quickly
- Use the money to pay off debt, buy a home, or start a business
- You’ll receive less than you would have received over time, based primarily on the discount rate
- The process typically takes two to three months from start to finish
Tax Implications of Selling Settlements
Most structured settlements are not subject to U.S. federal income tax because they are not considered income by the IRS.