Based on our recent post about the secondary market for structured settlement annuities, you know that transferring your rights due under your structured settlement is legal. However, knowing you can sell your payments doesn’t mean you should. There is a reason why a portion of your settlement was earmarked in a structured settlement for you in the first place.
If you are considering selling your structure, involving your lawyer or a dedicated settlement planner who specializes in tough life circumstances is recommended before you shop around for an offer.
What is your Structured Settlement Worth?
If you were selling your house, there are all sorts of calculators — search engines, Zillow estimates, and professional realtors — who can tell you, within a roughly $3,000 to $5,000 margin of error, what your property is worth. But if your sole asset is your structured settlement, getting a good estimate of worth is nearly impossible.
There are some ways to approach determining what your structure is worth, or what its fair market value is. A market is always defined as “what someone is willing to pay for a thing.” But one problem with structured settlements is that there is no way for you to professionally list, or make it know, that your structured settlement is for sale. That’s why JG Wentworth spends hundreds of millions of dollars on proactive television advertising. They want you to know they will buy your asset, even if you haven’t publicly listed or expressed your desire to sell it yet.
How else can you calculate what your structured settlement is worth? You can simply subtract the payments that you have received under the annuity from what you paid for it. Although imperfect, as this does not account for some of the interest accumulation that occurred inside the policy, it’s an easy way to start. So, if you purchased a $1 million structured settlement annuity in 2014 that pays $5,000 a month for 30 years, and you wanted to know it’s value today, you simply subtract $60,000 times four years, or $240,000 from the $1 million. A rough estimate of the value would be $760,000.
Another way would be to get a quote in the current marketplace of what an annuity with your exact terms would cost if it were brand new.
Future value vs Present Value
Present value, also called “discounted value,” is the current worth of a future sum of money or stream of cash flow given a specified rate of return. Present value is what your investment would be worth if you were to spend it today. This amount is affected by a “discount rate”, and there are several online tools that provide present value calculators to help you determine this.
Below is an example so you can get an idea of what discounting looks and feels like. Your structured settlement of $1,000,000 pays you $4,275.00 a month for the next 30 years. By using the PV calculator, the below table will help you understand what the value of your structured settlement is given various discount rates.
Discount Rate: Cost of $1 million structure:
- 2% $1,150,831.16
- 3% $1,006,417.60
- 4% $886,551.75
- 5% $786,481.83
- 6% $702,444.73
- 7% $631,449.93
- 8% $571,113.35
- 9% $519,527.70
- 10% $475,161.42
- 11% $436,780.22
- 12% $403,385.40
- 13% $374,165.70
- 14% $348,459.60
- 15% $325,725.24
- 16% $305,516.95
- 17% $287,466.68
- 18% $271,268.98
Why did we go all the way to 18%? Well, unfortunately, that’s an industry number that people often sell structured settlement payments at. This means a buyer could purchase your $1 million structure for a mere $271,000. The reason for this is because there is no real marketplace competition. Even if you call 10 different firms that are in the business of buying structured settlement payments rights, the best discount rate you may see could be as high as 9%.
The factoring companies that buy structured settlements are often highly leveraged, or they owe a lot to banks that provide them with the capital to purchase your payment streams, so therefore they will only offer you so much for your annuity.
If you are in need of cash immediately, or you are considering selling your structured settlement annuity, understand that it is a very valuable asset, and that if you take your time and work with the right people who can find private investors who want your asset, they are likely willing to pay much more for your asset than anyone else. At a 5% discount rate, you are probably getting close to a fair market value that delivers you as much cash as possible, and still allows a private investor to buy a valuable asset at a good rate.
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).