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Should I accept early payments on my structured settlement and what is fair and reasonable?


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5/13/2013
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Question Detail: I have one lump sum payment of $40k left from a settlement I was awarded. I am a new mother & a college student and the money would really help me finish my degree & put my family in a stable place. How would I go about doing this?

Answer: I really dislike when I get this question because often times it means the annuitant is desperate and easily taken advantage of by the sharks trolling the water to buy up personal injury structured settlements. People who have suffered a personal injury aren't really all that knowledgeable about finance so most won't even know when they are being taken advantage.

So let's see if you have the background to understand some basic concepts. Answer a few questions. Do you know what a discount rate is and how it will affect the amount you receive? You see that $40,000 isn't really $40,000 sitting in an account just waiting for you to decide it's time to reach out and take it. The amount invested is less than $40,000 and remember it is invested. If the insurance company that entered into the settlement agreement pays it early they have to cash out of whatever it is invested in. That means there may be a cost to them to get out of whatever it is they invested your money. My point is you'll never get $40,000 today when it's due some time in the future.  Youu'll get less, probably much less. 

Do you know anything about capitalization rates, discount rates, interest rates and the time value of money? I’m guessing you don’t and you’re assuming they will be fair with you. That’s the biggest mistake you can make because this isn’t about fairness it’s about capitalism and investing for them. (i.e., making and saving a profit)  Investing from their side of the deal means maximizing their investment return, not yours. While there is some risk with a structured settlement there isn’t much so the cap rate should be really low, sort of like a Walgreen’s lease. [5%] Do you have any idea what it is I’m talking about? To sell your structured settlement you need to understand these concepts or you will need to hire someone who does so that you get a reasonable value for what you own.

Let us just assume the $40,000 you want is really worth $30,000 at this point in time. Well, how will you know if $30,000 is a fair offer for the $40,000 payment in the future? And that brings up a good point. You never did mention when this last $40,000 payment was to be paid? The farther out into the future the less it's worth now. That's because the insurance company would have more time to earn a return on the corpus of the investment to ultimately come up with the $40,000.

The structured settlement is an annuity, it’s an asset that you own which gives you the right to receive the stream of income. In this instance there is one last payment of $40,000.00 if you wait until that future date when according to the agreement it comes due. If you want it before that date you will get paid less, because the money isn’t compounding as long.

Does any of this make sense?

You should hire a lawyer or even an accountant that understands capitalization and discount rates to negotiate it for you. Trust me when I say this, these companies will take advantage of you and without someone who understands the time value of money you are a sitting duck. Call me if I can help and if I don’t hear from you good luck, because you’re going to need it.

Additional Resources:

I coud list no fewer than 10 companies that will buy your structured settlement, but there is no way I'm going to help any of them by putting you squarely in their sites. Call me!



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