If this sounds like you:
I’m not sure if I want to sell my structure, nor do I even know where I would start. I see ads for companies all the time on Tv and the radio to “get my cash now.”
Then you may be wondering what your structured settlement is worth. Below, we break down a few details to begin to answer this question.
Can I get an appraisal for my structured settlement?
Yes, it’s much like getting an appraisal if you were selling a home.
Another way to value something is to calculate its worth as an investment. A PhD economist would say the true value is its “present value.” With a structure, you own a guaranteed stream of payments in the future. The value of that cash flow is its present value.
Can I sell my structure for what it’s worth?
Yes, but practically no one may be willing to pay you its full value. After all, they could just buy a brand new annuity from the same company instead of buying yours. The problem people face in selling their structured settlement is while you have valuable money coming in, its in a form that is not easy to sell or liquidate. Just like a fire-sale of a home, people get pennies on the dollar for valuable things when they need cash in an emergency.
An example may look like this:
You were in a car crash as a child, and your parents arranged the settlement to be paid out as a structure for your benefit and protection. The payments designed for you in 2005 provide $15,000 a year for 25 years. Your annuity currently still has 20 years of $15,000 a year remaining. As of today, a new annuity with the same terms would $229,185.00. Assuming 3% inflation, your annuity has a present value of $183,415.98.
If you called a big-name company to sell your structured settlement, they may quote you at a 10% discount rate and offer you $123,204.98 after court costs.
What is a discount rate for structured settlements?
A discount rate is the percentage rate that is applied to each year in calculating future value to present value. The formula for present value is
The Present Value formula may sometimes be shown as
The discount rate is the rate of return that all of the future payments are brought back to present value. Its also the rate of return that an investment today would need to yield, in order to achieve the guaranteed future payments of a structured settlement. Most kids who grow up with a settlement annuity don’t know exactly what their settlement was for. Meaning they don’t know how much the lawsuit settled for, and how much money originally funded their structured settlement. Even if they did, if that was 10 years ago, that original funding amount isn’t very helpful in evaluating what your stream of payments or structured settlement payments are worth today. Often legal settlements for children are confidential, and parents, lawyers and judges typically advise to never talk about how much the case was worth and to maintain confidentiality. This is good advice for the protection and privacy of the minor, however a young 18 or 19 year old may not have any information regarding their original settlement.
What is a good discount rate? Is 10% good? Not really. 6% is ideal, and if there are buyers that are willing to pay a premium for your payment stream, perhaps 5.5%. Remember, a buyer is getting an guaranteed asset that will yield what the discount rate is less transaction costs. Compared to traditional annuities that yield 3% or 3.5%, factored structured settlement annuities, or secondary market annuities are a very valuable asset, considered to be a form of commercial paper. The lower the discount rate the better. Shopping multiple companies is often advisable as the only way to truly get companies to compete for your asset(the structured settlement). You can also hire an attorney or CPA, or a broker like our firm, to help you evaluate what you have, and to solicit offers from interested buyers. The real problem in the industry is that there is not a robust marketplace with thousands of buyers and sellers, like the New York Stock Exchange, or say even Zillow or Rocket Mortgage to deliver the best price to a seller.
So, if an emergency comes up unexpectedly, an annuitant might naturally look toward that settlement to get some money fast. Unfortunately, the current players in the marketplace try to “buy low and sell high,” which takes advantage of both sellers and buyers. The system is so inefficient that $1.8 billion in future payments transfer annually for just $600 million. That’s a lot of money leaving the pockets of the policyholder and going straight to big companies.
What’s my structure worth?
Your structure is probably worth an amount much closer to the $183,415.98 value we stated above.
One problem is that no one knows you want to sell it. If you could list your structured settlement on Amazon or eBay, perhaps there would be buyers there (but unlikely). In reality, there are only a handful of companies with the experience to get the sale of your structure court approved and has the money to pay you cash for the stream of payments. There has to be another way.
A company is on the horizon that’s changing the paradigm. Until then, the marketplace remains tricky, especially for sellers.
What questions should I consider before selling my structured settlement?
Here are a few:
- Am I willing to wait 2-3 months for the absolute best offer?
- Is selling it in my best interest? (Most people who liquidate their structures spend it within a year.)
- Is there any other way to get the emergency funds I need without selling?
- Whom do I trust to give me the right information?
Whether you are in a bind for cash, or just really don’t want your structured settlement, it’s extremely helpful to get the assistance of an expert planner. Making the wrong move could cost you a huge chunk of what your structured settlement is worth.
A West Point graduate where he served as captain and military aviator, John Bair continues his commitment to our country through his efforts within the settlement planning industry. He has represented families of victims lost in the Flight 3407 crash, offered pro bono services to the families of 9/11 victims and drafted the first consumer protection bill for plaintiffs (H.R. 3699).