How to sell a structured settlement annuity
A structured settlement annuity provides payments as part of a legal settlement, often tied to a personal injury claim. Instead of receiving a single lump sum, you receive payments spread out over time. If you need to access your money sooner, selling a structured settlement can give you an upfront payout in exchange for future scheduled payments.
Under the Structured Settlement Protection Act (SSPA), courts must review and approve any sale of your settlement annuity to ensure the transaction is fair and supports your long-term interests.
Read on to learn more about structured settlements, including why people sell them and what to expect during the process.
What is a structured settlement annuity?
With a structured settlement annuity, you receive periodic, generally tax-free payments from a legal settlement rather than a lump-sum payout. Settlement annuity and structured settlement annuity refer to the same insurance-funded payment stream and share the same purpose: providing long-term financial payments without using the whole settlement at once.
Why should you sell a structured settlement annuity?
Many people sell part or all of their structured settlement payments for one or more of the following reasons. Before selling a structured settlement annuity make sure it is in the best interest for you as you are giving up future income payments.
Immediate access to cash
Selling your structured settlement annuity can give you access to funds much sooner than your scheduled installments. This quick turnaround can convert long-term income into usable funds when timing matters most. It can help with practical needs like paying off high-interest debt and medical expenses.
Flexibility and liquidity
If you sell your annuity, you can gain more freedom in managing your money. You get all your funds in a lump sum, typically at a discount, which can let you decide how and when to use them. Aside from simplifying your budget, this added liquidity can streamline financial planning.
Funding major purchases or investments
Selling a portion of your settlement can support large goals that scheduled payments can’t cover. It can help you purchase a home, launch a business, or build an investment portfolio. The lump-sum payout can help you take advantage of these opportunities instead of waiting for payments to accumulate.
Change in life circumstances
Life events can create extra expenses you didn’t anticipate when you first received your settlement. Job changes, relocations, and family responsibilities may need additional resources. Selling some or all of your payments can help you adjust your finances to match those new demands.
Estate or financial planning needs
Turning structured settlement payments into a lump sum can help make estate or retirement planning easier. You can reorganize your assets and take care of financial obligations that scheduled payments might not address.
How to sell your structured settlement
Here’s how to sell structured settlement payments.
Review your settlement terms
Read through the settlement agreement to confirm whether sales are allowed. Also check to see if there are restrictions or additional steps required. By confirming your eligibility upfront, you can avoid delays later on in the process.
Consult an attorney or financial advisor
Team up with a qualified professional who specializes in structured settlements. They can explain the legal requirements and help you evaluate the impact of selling payments. Their guidance can ensure you follow state and federal rules.
Contact reputable factoring companies
Reach out to settlement buyers and request quotes from at least three factoring companies. Comparing offers can help you find the best value for your payments. Research each company carefully to avoid predatory practices.
Choose a complete or partial sale
Decide if you want to sell all of your remaining payments or just a portion. A complete sale converts your entire settlement into a lump sum. A partial sale lets you keep some scheduled payments while still gaining cash.
File a petition in court
Your attorney will file a petition with the court for approval. The judge reviews the sale to confirm it’s reasonable and in your best interest. Both partial and complete sales require court approval before moving forward.
Receive your lump sum payment
After the court approves the sale, the factoring company issues your lump-sum payment. Funds typically arrive by check or direct deposit. The buyer then assumes the right to receive the payments you sold. Note that this process can take months or even longer depending on the parties involved, complexity of the situation and the court’s schedule.
Pros and cons of selling your structured settlement
It helps to weigh the benefits and drawbacks of selling your structured settlement to see how it could affect your finances.
Pros
- Access a large lump sum: Selling delivers your funds in a single payment, giving you access to money as a lump sum payment.
- Pay off high-interest debt: A lump sum may help you knock out debt and cover emergency expenses much faster than scheduled payments.
- Fund education, home purchase, or medical care: A big payout could help you fund major goals.
- Gain financial flexibility: Selling a settlement annuity lets you control how and when to use your funds, potentially giving you greater flexibility in financial planning.
Cons
- Receive less than the total settlement value: Buyers purchase from you at a discount, so you usually get less than the full amount of your scheduled payments.
- Lose financial security: Selling reduces or eliminates the guaranteed income you would have received and can affect your overall financial stability.
- Must undergo court review: You need court approval for all sales, which takes time (and money) and requires documentation.
- May face taxable outcomes: Structured settlements are normally tax-free, but certain sales or transactions could lead to tax obligations.
How much is your structured settlement worth?
Understanding the value of a structured settlement starts with knowing how it's calculated.
Present value vs. future value
Structured settlements provide future payments. To understand what they’re worth today, these payments must be converted into present value. Buyers compare this figure to the total amount you would receive over time. The difference reflects the cost of receiving money now instead of later.
Payment structure
Settlements with frequent payments typically have higher present values because cash arrives sooner. Payments spread out over many years can lower the cash offer.
Discount rate
A discount rate adjusts future payments for the time value of money and market conditions. A higher rate reduces the lump-sum offer. Rates vary by company, state rules, and economic factors.
Fees and transaction costs
Administrative and legal fees can lower the net amount you receive. Some buyers include these costs in their offer while others deduct them at closing.
Legal and tax considerations to expect after selling
Here are common legal and financial factors that come into play when converting structured settlement payments into a lump sum.
Legal considerations
- Federal and state laws require court approval to ensure fair transactions.
- Some states add other requirements or protections for sellers to follow.
- Selling may affect future payments to dependents or others named in the settlement.
Tax considerations
- Cashing out your settlement forfeits future income for liquidity.
- Certain sales of the lump sum could result in taxable income.
- Buyers usually apply a 6% to 18% discount rate, which can largely decrease the total payout.
Taxation rules
Most payments from personal injury or wrongful death settlements are tax-free. However, portions that cover lost wages or punitive damages may be taxable. Selling payments can also create exceptions. So it’s important to consult qualified legal and tax professionals before completing a sale.
Get started with a Gainbridge annuity
Gainbridge provides annuities designed for retirement savings and long-term financial planning. These products differ from structured settlement annuities but still can offer guaranteed income over time.
Gainbridge also offers a 30-day free look period to make sure the contract fits your needs. See for yourself: Explore Gainbridge today and begin planning for your financial future.
FAQ
Do you have to pay taxes on a structured settlement?
Structured settlement payments from personal injury or physical sickness claims are typically tax-free. However, portions of the settlement could be related to lost wages or punitive damages and are often subject to federal and state taxes.
What is the downside of a structured settlement?
Although structured settlements can provide long-term financial security, they are not the same as a lump sum cash payout. You can’t use all the money at once unless you sell your payments, which means receiving less than the total value due to discount rates and fees.
This article is for informational purposes only. It is not intended to provide, and should not be interpreted as, individualized investment, legal, or tax advice. For advice concerning your own situation please contact the appropriate professional. The Gainbridge® digital platform provides informational and educational resources intended only for self-directed purposes. Guarantees are backed by the financial strength and claims-paying ability of the issuing insurance company.
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