Structured settlement payment rights are valuable financial assets. When you sell these payments in a secondary market transaction, you are transferring these rights in return for a lump sum cash payout with a present value that will be less than the value of your payments over time.
You need to go into these transactions with the understanding that you will be losing money for up-front cash, against the long-term value of your structured settlement payments. The question is how much? With that in mind, the following tips are helpful in evaluating buyout offers for your structured settlement payments.
Present Value vs. Future Value
If you never sell structured settlement payments, they have a set value over the timeframe that you receive them. This means at the end of your payment life, you will have received a finite amount of money. This is a very simplistic view of future value.
Now, when you choose to sell some of your payments, the buyer is giving you cash right now for a number of future payments that he now has to wait on. The buyer incurs costs for operating the business that purchases your future payments, for advertising, etc. Other criteria impact what these payments are worth as well:
· The total sum of your structured settlement payments
· The number of years you are set to receive the payments
· How many of your payments (and how much of each payment) you need to sell
· Which payments and what type you are selling
· The strength of the company issuing your payments
Other economic issues, such as inflation, play a role and all of these factors help determine the present value of future structured settlement payments. These equations and evaluations are what impacts the discount rate you will be offered and the resulting sales price presented in the buyout offer. But this is a very complex mathematical evaluation that begs the services of a financial professional. The important thing to understand for the purposes of evaluating your buyout offer is that the present value of your payments is less than the future value. So, you need to concentrate on getting a fair value when selling your structured settlement payment.
The lump sum you are offered is reduced by a factor of the projected earnings from the payments you are transferring. This is the discount rate in a nutshell. Typically, this rate may vary from anywhere between 8% and 18% and is impacted by many criteria, including how long the funding company will be waiting to receive the payments. As the seller, you are seeking the lowest possible discount rate, provided all other important features of your buyout offer are equal. Naturally, the buyer benefits from a higher discount rate. Your financial advisor and quotes from a few select, reputable structured payment secondary market companies can help you determine whether you are receiving a fair discount rate.
The Buyout Offer should include a disclosure statement that outlines all the primary terms of the transfer:
· Schedule and total of structured settlement payments being assigned
· Itemized expenses you will be paying
· Total purchase price
· Discount Rate
Carefully read and evaluate the contract terms of the buyout offer, preferably with an experienced financial advisor. Be on the lookout for stipulations and provisions that go against your best interests:
· Limitations on your right to sell future payments to another company (i.e. rights of first refusal)
· Burdensome arbitration requirements (i.e. requiring that you pay the fees for any arbitration, inconvenient locations for arbitration, etc.)
· The company holds security interests in all of your payments (i.e. the buyer directs all of your payments to be paid to their company and then they will send you back what they don’t purchase)
· Oral or written language that suggests your deal will be submitted/approved in a different state than yours
· Suggestions that you back date any contracts or documents are a major no-no
A structured settlement payment purchasing company that offers you more than one potential transaction option is much more likely to be looking out for your best interests and working to ensure you reach an agreement that is beneficial to both parties.
Compare! Compare! Compare!
Do not rush into any agreement! Take the time to carefully read and discuss the terms of any and all purchase agreements before deciding to move forward. Depending upon the state you are in, you have a minimum of 3 days and as many as 14 days to review a structured settlement payment buyout contract prior to legally signing the agreement. Many sellers are concerned with nothing more than the purchase price and/or the discount rate. Concentrating solely on this aspect is frequently a mistake. Instead, compare all of the very important aspects of your buyout offer as identified in this article and compare 2 or 3 offers to ensure you choose the best possible purchase agreement terms.
Bear in mind that your situation is unique to your needs and should be tailored as such. Knowledge of these types of transactions and detailed information about your specific offer is the key.
Author- Bill Brown