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Is a Structured Settlement Really Your Money or Not?

Anybody that’s watched daytime television over the past few years has probably seen those goofy ads where opera singers tell viewers that a structured settlement is their money. Are the TV pitchmen really correct? Is a structured settlement truly the property of a recipient?

The answer is actually more complicated than those advertisements make it sound. The funds in a structured settlement are actually held in a legal contract called an annuity that is under the control of an insurance company. They are actually the insurance company’s money. The company is required by law to pay a set amount of the funds to a recipient (called an annuitant) on a regular basis.

What the annuitant actually has is a legal right to receive the payments. The interesting part is that the annuitant can sell that legal right to receive payments as long as he or she is not violating the contract that created the structured settlement.

How a Structured Settlement Works

In a structured settlement, a plaintiff or claimant agrees to dismiss a lawsuit or claim. In exchange for that action, the defendant or the defendant’s insurance company agrees to purchase an annuity and make the claimant the beneficiary. The idea behind this is to give the persons disabled in accidents a regular source of income.

The claimant doesn’t actually receive money in this arrangement. Instead, what he or she receives is a contract obligating an insurance company to make payments to him or her over a period of time. In most cases, the claimant has the legal right to sell the contract.

A structured settlement is not the same as cash, but it can be sold for cash. There are professionals called factors that make it their job to purchase structured settlements and similar arrangements. These companies want to buy the contracts because they can be sold as investments.

How to Tell if a Structured Settlement can be Sold or Not

The way to tell if a structured settlement can be sold or not is to examine the contract signed when it was created. The contract should specify if the recipient has the legal right to sell the annuity. Not every contract gives a recipient the right to do this.

If a person cannot tell whether they have that right or not, they can contact an attorney or a structured settlement buyer. One of those professionals will be able to tell them if they have the right to sell the annuity or not. Something to be aware of is that some states have laws restricting the sale of such settlements.

How much is a Structured Settlement Worth?

Determining the cash value of a structured settlement is difficult because it is usually a matter of the buyer’s judgment. The purchase price will be much lower than the total value of the remaining payments in the plan. The buyer cannot give a purchaser the full amount because he or she needs to make a profit from it.

Generally, the final cash price will be much lower than the total of the annuity payments because the buyer will resell it as an investment. The settlement may pass through the hands of two or three buyers before it is finally sold to an investor.

Here’s how the process works. First, a factor or settlement buyer pays a cash price to the recipient. The factor then sells the annuity to a broker, who sells it to an investor. Since both the factor and the broker need to make a profit on the deal, the price they pay will be much less than the final price.

Is Selling a Structured Settlement a Good Idea?

Some people will wonder if an individual that is selling a structured settlement gets a bad deal. That’s difficult to determine because every situation is different. A person that receives a $500 a month payment from a structured settlement, but has $10,000 in credit card debt, might be better off selling the settlement for $15,000 and paying off the credit card debt. After all, it will take the individual nearly two years to pay the debts off with the monthly payment.

Others will be better off simply putting the cash in the bank and using it as an emergency fund. Most financial experts recommend that individuals and families keep enough cash to pay bills and expenses for several weeks or months on hand. Selling a structured settlement can give a family the cash to create such an emergency fund.

One factor to use in determining whether a settlement should be sold is the size of the payments. A settlement that offers low payments may not be a very good deal. On the other hand, one that provides high payments may be a good deal.

Another is the other income available to the family. If the recipient can live without the regular payment, selling it is definitely an option. The cash from the sale can be more flexible and useful than the payment itself is. If the recipient needs the payment to cover day-to-day expenses, then selling it might actually be a very bad idea.

The bottom line is that a structured settlement is not actually a person’s money. It is a promise of payment, and on some level, an investment vehicle. Just as people sell investments such as stocks and bonds, they can sell settlements.

People that want to get a large lump sum of cash will have to sell their structured settlements. A structured settlement in itself is not cash, nor is it a bank account; it is simply a contract obligating an insurance company to make a specific number of payments. The only to convert such an agreement into cash is to sell it.

Selling a structured settlement is a tough decision that should always be undertaken with advice from experienced professionals. The best way to get such advice is to contact several different structured settlement buyers and find out much the annuity is worth. Only after talking to such buyers should a person make a decision about a sale or not.