Should I sell my structured settlement to access a lump sum of cash?
Should I buy a structured settlement being sold on the open market?
These are questions on the mind of many as we enter a new year. After all, if we have big plans for the coming 12 months, chances are they might benefit from an injection of capital.
While this article won’t give you any personal advice on finance (you should speak to your financial advisor, structured settlement lawyer or your accountant for that), it will highlight the areas you should be thinking about before you respond to that persuasive TV commercial.
Selling structured settlements: the advantages
When you won your lawsuit, the happiness or relief you felt may have overwhelmed your natural tendency to weigh up the benefits and costs of taking a certain course of action.
Chances are, the structured settlement specialists or lawyers involved in your case advised you to choose this form of settlement rather than a lump sum. It may even have been the right decision at the time.
The main problem with structured settlements is that they are illiquid – that is, they cannot easily be turned back into cash by being sold or traded. This can mean having substantial – sometimes life-changing – money locked away for the future.
Sometimes, a change in circumstances can leave the claimant struggling to meet their day-to-day needs but unable to access the cash they need to tide them over.
For example, perhaps you were expected to return to work in two years but you were also expected to upgrade a wheelchair every five years. Your structured settlement may have included regular monthly payments for 24 months and a lump sum every five years.
However, say technical advances have meant that your wheelchair is fine for ten years but you lost your job. You would then find yourself out of money two years after your award and having to wait three years for a lump sum you won’t really need by then.
The fact that you can sell structured settlements via a broker will probably come as a relief because you can free up that money you so badly need.
When you should hold on to your structured settlement
If there has been no change in your expected future needs, it is unlikely that selling your structured settlement payments will be in your best interests. However, there are some situations where the picture is less clear. This calls for some honest and realistic thinking and financial advice.
For example, some structured settlements take the form of a life contingent annuity. If you are concerned that you might not be around to see the settlement mature, that Caribbean cruise you always wanted to enjoy may be an attractive proposition. Just be aware that life contingent annuities will tend to be discounted more due to the higher risk to the investor. You may read the complete guide to Annuities here.
If there is any doubt over whether switching a structured settlement for cash is wise, it is probably best to hold on to it. After all, the court has to justify allowing a sale by proving it is in your best interests. If you are unable to convince yourself, you won’t be able to convince a judge.
Why buy structured settlements?
If you are in the other camp and are interested in what investment opportunities are out there, there are some very good reasons for considering adding a structured settlement to your portfolio.
First, you might want to get up to speed on what a structured settlement actually is. In simple terms, it is a court settlement (often as a result of a personal injury or punitive damages claim) that has been structured to provide long-term financial support.
It is an alternative to simply handing the claimant a lump sum of cash. This protective measure is often necessary since many people are unused to managing large sums of money and there are plenty of case studies of people becoming rich overnight and then bankrupt shortly afterwards.
As a court instrument, structured settlements are legally binding so the insurance company that holds the asset is unable to default on the payout.
This is one good reason to consider investing. In any case, these insurance companies are often big, highly capitalized corporations adding another layer of trust (although even the biggest companies can collapse as we are now all too aware).
Despite this relatively low level of risk, structured settlements often provide a high rate of return. The main drawback of this unique form of investment is that you have to wait for the scheduled payout dates and there’s no ‘cashing in early.’
In the trade, this is known as ‘illiquidity’ and is the very same reason the original claimant sold their asset in the first place.
There is also the risk that inflation swallows up some of your profit although some structured settlements are designed to take this into account.
Structured settlements are usually sold by brokers who specialize in working with claimants and the courts to authorize the sale of structured settlements. They then sell them on to investors and take a commission.
If, after careful analysis, you are still tempted by a structured settlement investment you have come across, it is wise to balance it with other, more liquid, assets to avoid being dependent on one source of profit.
Alternatives to cash for structured settlement payments
If you’ve read until now and really don’t fancy cashing in on your future security, you are probably wondering what other options you have.
One alternative is the classic loan. We have detailed the paperwork you need and broken down the different types of loan in a previous article so we recommend you read through that if you decide a loan is a way to make your 2020 dreams a reality.
If you are unable to access a bank loan, you may be able to secure credit with an online lender. Just make sure you research the loan provider thoroughly and fully understand both the interest you will pay and the penalties you will receive if you don’t repay the loan on time.
Investing in corporate bonds, mutual funds, stocks or shares is another popular way to increase your wealth. There are many options to choose from ranging from low-risk government-backed bonds to speculating on the stock market.As a technically-minded person, you might be attracted to trading cryptocurrency via the many online exchanges out there.
Other finance articles we have published have looked at the value of investing in property. This is another time-honoured way of generating personal wealth either from renting out properties that you own, doing up and reselling properties or a mixture of the two.
As you can see, investing in structured settlements is just one of the many interesting alternatives to putting all your money in the bank (or worse still, under the mattress).
However, the investment vehicle that suits you will depend on your risk appetite, the amount you want to make and the length of time you are willing to wait to receive your rewards.
And if you are the owner of a structured settlement yourself, make sure you are absolutely certain that selling it will benefit your finances at least as much as any investor seeking to buy it.