Plaintiffs who had a personal injury, wrongful death or workers’ compensation lawsuit settled in their favor or who have won the lottery may sometimes be the recipient of a substantial financial award.
These types of monetary awards can be disbursed all at once in a lump sum or over time in a series of regular, tax-free payments known as a structured settlement. When a structured settlement is established, the payments are often made through an annuity purchased on behalf of the recipient and managed by an insurance company.
If you’re in need of immediate cash at some point down the road, you may be tempted to turn to your structured settlement fund and take all the proceeds at once. Before making such a big decision, consider the pros and cons. You’ll pay a fee to cash out and may jeopardize your future financial security. But if you need money now, cashing out may make sense.
How cashing in a settlement works
Structured settlements are the source of about $10 billion in annual payments to more than 30,000 recipients each year. These payments are tax-free and the income does not impact eligibility for such programs as Medicaid or Social Security disability benefits.
However, recipients may consider cashing in their structured settlement entirely when an emergency occurs or there’s a need for a substantial sum of cash.
“Things like medical emergencies, car troubles, home repairs, tuition payments, investment opportunities, business capital and debt are just a few of the common reasons that we see customers reach out to us looking to access a lump sum payout,” said Brian Lawlor, senior vice president for structured settlements with J.G. Wentworth, one of the country’s largest buyers of structured settlement payments and annuities.
Cashing in a structured settlement typically requires working with settlement buyers or factoring companies that specialize in buying settlements and providing a lump sum cash payout. When selling, you can liquidate the entire settlement or just a portion of your upcoming payments.
“A recipient may just want to get a few months’ or years’ worth of payments immediately, and then revert to the original schedule,” said Michael Sullivan, a personal financial consultant with the nonprofit credit counseling and debt management agency Take Charge America.
When contacting a buyer like J.G. Wentworth, a company representative will review your settlement fund, the amount of your monthly payments and current financial needs and offer two or three different buyout options.
Court review
Cashing out a structured settlement typically requires a judge’s review and approval before finalizing the sale.
“Once an offer is accepted, the settlement company will file a petition in court to transfer the structured settlement. The judge has the final say,” said Steve Sexton, CEO of Sexton Advisory Group.
When reviewing the sale, a judge will typically consider such factors as your living expenses, life expectancy, and future financial needs. This process can take anywhere from 45 to 60 days.
Cost to cash out
Cashing out your settlement payments upfront, or a portion of them, is not free. While many settlement buyers will not charge you a direct fee, they will buy your monthly payments at what’s known as a discount rate. In other words, the sale is not a dollar-for-dollar exchange. You will not be paid the full amount you would have received for each of your future monthly installment payments.
“If the cash settlement company moves forward, they will offer the payee an upfront sum to surrender the payment stream along with a discount rate,” said Sexton. “The discount rate ranges between six percent and 29 perent.” You can negotiate the specific rate, but they are not take-it-or-leave-it offers, said Sexton.
Before accepting an offer from a company, it’s a good idea to shop around to get the best deal possible.
“Not all companies are equal and a seller should request at least three offers before selling,” said Sullivan. “Often smaller buyers will pay more since they have fewer costs, but that’s not always the case.”
Advantages of cashing in your settlement
While there is a cost associated with cashing out a structured settlement, there are also benefits to doing so.
Lump sum to cover significant expenses
Liquidating a structured settlement and taking a single payout can help you cover major financial needs that you might otherwise have to take a loan to pay for. This might include college tuition, a wedding, home purchase or medical expenses.
Ability to clear-up debt all at once
If you have substantial debts, cashing out a structured settlement may provide the funds needed to help pay off outstanding balances and get back on track right away. “By cashing in a settlement, a person having financial problems might get the liquidity they need to resolve their financial issue,” said Sexton.
Peace of mind
It’s no secret that debt and money shortages cause stress. Eliminating debt or using the money from cashing out a structured settlement to cover the costs of major life expenses–rather than taking loans or using credit cards–can provide you with peace of mind.
Disadvantages of cashing in your settlement
Before cashing out your structured settlement consider the price you will pay and some of the other disadvantages.
Losing money
Settlement buyers pay a discount rate for your monthly settlement payments, meaning you will not pocket as much money through a cash-out plan as you would have through receiving the payments over time as scheduled.
“Some structured settlement companies charge 25 percent to 50 percent of the payment amount to be received,” said Sullivan. “That means getting the rest of $500,000 remaining in an annuity might result in a loss of $125,000 to $250,000.”
It’s not immediate cash
Even though you are cashing in your structured settlement, it still takes a little bit of time to get the cash. Typically a court review and approval of the sale is required. “The transfer can take anywhere from 20 to 45 days or more to complete,” said Sexton. “This delay creates stress for the seller because in many cases, they need money quick.”
Loss of long-term security
Structured cash settlements provide a steady and reliable stream of cash often over several years or even for the remainder of your life. What’s more, having the money distributed in increments, rather than cashing out, protects you from making big splurge purchases or using the money up quickly. “In addition to the loss of cash, there’s a loss of security. Funds that had been set aside are suddenly gone,” said Sullivan.
Bottom line
Cashing out a structured settlement can be a good way to access a significant amount of cash for an emergency, major life expense such as a home purchase, or to pay college tuition. But before making such a significant decision, review all of the costs carefully. If you decide to proceed with a sale, get offers from at least two to three different buyers to ensure you’re getting the best deal possible.
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