Selling Structured Settlements: An In-depth Guide

Rebecca Parson
Rebecca Parson

Rebecca Parson

Author

Rebecca Parson is a financial and tech writer with 10 years of experience writing about topics such as life insurance, commodities investing, and the SaaS industry. She has a master’s degree from Johns Hopkins University and a bachelor’s degree from the University of Mary Washington. Her writing has appeared at money.com, sacbee.com, cart.com, herodevs.com, blanchardgold.com, and more.

Brian OConnel
Brian OConnel

Brian O'Connel

Contributor

Brian O’Connell has been a contributing writer for U.S News & World Report since 2016. A former Wall Street bond trader and the author of two best-selling books; “The 401k Millionaire” and “CNBC’s Creating Wealth”, he has 20 years experience covering business news and trends, particularly in the business and financial sectors. He believes education is the best gift a financial consumer can receive – and brings that philosophy to every story he writes. His byline has appeared in dozens of top-tier national business publications, including CBS News, Bloomberg, Time, MSN Money, The Wall Street Journal, CNBC, TheStreet.com, Yahoo Finance, CBS Marketwatch, and many more.

By Rebecca Parson, Brian O'Connel
Author, Contributor, Life Insurance

Key Takeaways

  • If you sell your structured settlement, you get cash now but give up the full amount you would have gotten over the long term.
  • The selling process involves legal paperwork and court approval, taking several weeks to complete.
  • Structured settlements and annuities, while similar in providing periodic payments, differ in their setup and regulatory requirements. As a result, selling them has different tax implications.

If you need quick cash, selling your structured settlement for a lump sum can be appealing. It’s important to weigh the advantages against the drawbacks before proceeding. While selling offers immediate funds, it comes with costs and could impact your long-term financial stability. 

But selling your structured settlement or annuity is worth a look for urgent financial needs.

What Is a Structured Settlement?

A structured settlement is a legal settlement that allows someone to get compensation over time through regular payments. For example, if someone is injured and can’t work, a structured settlement can provide monthly income. This income can cover living expenses and medical bills, often tax-free. 

Spreading out payments like this reduces the risk of spending all the money at once, but it’s hard to renegotiate a structured settlement after you’ve agreed to it. This is why people sometimes look into selling their structured settlement: because they need a lump-sum payment now.

How Do Structured Settlements Work?

Structured settlements often come out of civil lawsuits that result in one party paying another to compensate for damages. Sometimes the parties mutually agree to the structured settlement, and sometimes it’s court-ordered. 

Structured settlements take into account the financial needs and goals of the victim, the tax implications, and the details of the negotiation between the involved parties. The agreement lays out how much will be paid and how often.

Types of Structured Settlements

Structured settlements are tailored to fit various types of cases and situations, providing flexible financial solutions for recipients. Here’s how they apply to a few common scenarios:

  • Medical Malpractice: These settlements compensate for healthcare-related errors. Victims receive periodic payments to cover ongoing medical expenses and lost income.
  • Personal Injury: This type covers injuries caused by accidents or negligence. Structured payments help manage rehabilitation costs and compensate for lost wages.
  • Wrongful Death: Families of deceased victims receive payments over time. These aim to support the family financially, covering lost income and future needs.
  • Worker’s Compensation: Employees injured on the job can receive structured settlements. These payments are designed to cover medical bills and lost earnings.
  • Lottery Winnings: Winners can opt for structured payments instead of a lump sum. This choice provides a steady income stream over years, helping manage wealth.

Considering Selling Your Structured Settlement?

Selling your structured settlement can quickly provide you with a large lump sum, but there are important details to consider. Let’s examine them.

What to Know About Cashing Out a Structured Settlement

Cashing out a structured settlement (also known as “selling a structured settlement”) means receiving a lump sum instead of regular payments. People often choose this route due to immediate financial needs, such as medical emergencies, pressing home repairs, or seizing an investment opportunity.

However, you won’t get the full amount the structured settlement would give you over its entire term. The actual sum depends on the settlement buyer you choose.

Cashing out is a significant decision. At Beca Life, we’re here to guide you through this process, so you have the information you need to make the best choice.

Advantages of Cashing in Your Settlement

Opting for a lump sum from a structured settlement offers benefits, especially when facing large expenses. It allows you to manage significant costs without resorting to loans. Whether it’s for college, a wedding, buying a home, or unexpected medical bills, this option provides financial flexibility.

It also offers a straightforward way to eliminate debt. Access to a substantial amount of cash can clear outstanding debts, offering a fresh financial start. 

Finally, financial stability contributes to peace of mind. Using a lump sum to address major expenses or debt reduces stress compared to relying on loans or credit.

Disadvantages of Cashing in Your Settlement

Selling your structured settlement comes with downsides, however.

Firstly, you’ll receive less money than if you receive the payments over time. Settlement buyers typically offer less than the total value of your future payments. For instance, selling part of a $400,000 annuity could mean losing $100,000 to $200,000 of it.

Also, accessing your lump sum isn’t instant. The sale process, including court approval, usually takes 20-45 days or longer.

Lastly, the regular payments from structured settlements ensure a consistent income stream, which a lump sum can’t match.

Alternatives to Selling a Structured Settlement

When considering accessing funds from your structured settlement, selling isn’t the only route. Here are some alternatives.

Partial Cash-Out of Your Structured Settlement

This lets you sell payments from a specific time frame, like six months. You can also sell a portion of each payment, e.g., 25% of each payment for two years. 

Partial cash-out lets you balance receiving a lump sum with continued regular income.

Selling Specific Payments

With this method, you sell certain payments only, keeping the rest of your payment schedule intact.

Cash Advance

A cash advance on your structured settlement offers immediate cash, often up to $1,000, usually available within days. You get a lump sum now by giving up a part of your future payments. It’s faster than selling payments but results in less money over time.

How to Sell My Structured Settlement? The Selling Process Explained

To sell your structured settlement, you must find someone to buy it, usually a financial institution or a group of investors. They buy settlements for various reasons, including investment opportunities and profit potential. 

The sale process typically takes several weeks, involving legal paperwork and court approval. In the end, you get immediate cash instead of waiting for periodic payments, giving you financial flexibility for current needs or investment opportunities.

The 6 Steps to Sell Your Structured Settlement

  1. Compare Multiple Settlement Companies: Start by reaching out to several structured settlement buyers to find a reliable partner for your transaction. We recommend getting at least three offers before deciding.
  2. Get Your Structured Settlement Cash Quotes: Once you provide the details of your structured settlement, such as payment amounts and schedule, companies will offer you cash quotes.
  3. Review Your Settlement Offers: Consider which offer suits you best and verify the company’s capability to fund the deal. 
  4. Consult With a Financial Professional: Talk to a financial advisor, tax lawyer, or CPA knowledgeable about settlement sales for advice on how selling affects your finances. If you seek advice from the potential buyer of your settlement, you might get biased advice.
  5. Sign the Agreement: Officially agree to the sale by signing the contract. Always read the documents thoroughly and keep a copy.
  6. Receive Payment: The funds should arrive within a few weeks to a few months after the contract is signed, depending on the details of your deal. 

Court Review Before Getting a Structured Settlement Payout

Selling a structured settlement usually involves getting a court’s approval. After accepting an offer, the buying company seeks legal permission to proceed. It’s the judge who decides in the end.

During the sale process, a judge examines your financial situation, including expenses, lifespan, and future needs. The goal is to protect your interests and ensure the terms are fair and not predatory. This legal procedure might last 45 to 60 days.

Cost to Sell a Structured Settlement

Selling your structured settlement, whether in full or in part, comes at a cost. Settlement purchasers typically don’t charge upfront fees but instead buy your payments at a reduced value, known as a discount rate. This means you won’t get the total amount your future payments would sum up to.

When a company agrees to purchase your payment rights, they propose an immediate lump sum in exchange, applying a discount rate of 6% to 18%. This rate isn’t fixed, so sometimes you can negotiate more favorable terms than the initial offer.

Selecting the Right Buyer

Qualities To Look for in Legitimate Buyers of Structured Settlements

When selecting a buyer for your structured settlement payments, consider these factors:

  • Customer Service: It’s a red flag if a company rushes you or doesn’t answer your phone calls.
  • Physical Address: To ensure the company isn’t a fly-by-night operation, you’ll want it to have a physical location.
  • Discount Rate: Buyers offer varying rates. Use the market’s competitive nature to your benefit and don’t hesitate to compare offers for the best deal.
  • Options for Sale: Look for a buyer who provides flexibility with full or partial sales, instead of pushing you to sell all your future payments.
  • Reputation: Independent reviews on platforms like Google or the Better Business Bureau can offer valuable insights into other sellers’ experiences with the company.
  • Time to Payout: Typically, transactions take 1-2 months, though court approvals can extend this period.
  • Experience and Legal Support: A company’s longevity and the expertise of its staff are crucial, especially for getting court approval for your sale.
  • NASP Membership: A buyer who belongs to the National Association of Settlement Purchasers (NASP) adheres to industry standards, indicating a reliable choice.

Who Will Buy My Structured Settlements?

A structured settlement buyer is called a “factoring company.” Companies that purchase structured settlements and annuities offer immediate cash payouts, albeit at a lower rate than the total value.

This sector, comprised of various businesses and investors acquiring structured settlements, operates within the secondary market, which is closely monitored and competitive.

Factors That Settlement Buyers Consider When Determining Your Quote

When you contact a potential buyer, they’ll collect your details to find out how much money you want and how many payments you’re willing to part with.

Here’s what buyers look into for your estimate:

  • The value of your structured settlement
  • How many payments you’re interested in selling
  • Your payment schedule (how often you receive payments)
  • The creditworthiness of the insurance company that issued your structured settlement 
  • Any additional fees the insurer might apply for transferring your settlement
  • Prevailing market rates

Financial Considerations and Questions

Selling a structured settlement can feel daunting and complex, and it’s not something people do often—maybe only once in their lives. So, below, we’ve laid out a few financial considerations.

How Do I Know If the Quote Is Fair?

To determine if a quote for selling your structured settlement is fair, compare offers from multiple buyers. One reason to get three or more offers is that the discount rate can vary by 12% or higher. Let’s say you get just 3% more on a $250,000 settlement sale — that equals $7,500.

Additionally, check for hidden fees that may affect the total amount you receive, including administrative charges, legal expenses, transfer costs, and commissions. Consulting a financial advisor can also provide insight into the offer’s fairness.

Finally, consider the present versus future value of your settlement. How much money will you lose by selling now? Only you can determine if that’s worth it.

Tax Implications of Selling a Structured Settlement

Selling a structured settlement for a lump sum generally doesn’t incur taxes. In most situations, the IRS can’t tax the proceeds from a structured settlement, whether received as a lump sum or through scheduled payments. 

However, it’s important to note that certain types of structured settlement transfers may trigger different tax implications.

Selling Structured Settlement vs. Annuity: Understanding the Difference

What Are Annuities?

An annuity is a financial agreement between you and a life insurance company where the company makes regular payments in return for premiums you already paid. 

Annuities aren’t the same as life insurance. Typically, annuities are for your retirement, and life insurance is for your family if you die.

Is a Structured Settlement an Annuity?

While both annuities and structured settlements provide recurring payments, they’re not the same. An annuity is a financial contract with an insurance company. A structured settlement usually comes about from settling a lawsuit.

Differences Between Annuities and Structured Settlements

Annuities are usually part of retirement planning, so cashing one out before you’re 59.5 years old can trigger charges and a 10% tax penalty. That said, you don’t have to get court approval to sell an annuity, which makes selling faster than with a structured settlement. 

You do have to get a judge’s signoff to sell a structured settlement, but there usually aren’t taxes.

Examples of Structured Settlements and Annuities

Examples of structured settlements include:

  • Personal Injury Case: A car accident victim receives monthly payments to cover medical expenses and lost income, providing long-term financial support.
  • Workers’ Compensation Claim: An employee injured at work is awarded a structured settlement to ensure continuous income during recovery.
  • Wrongful Death Lawsuit: The family of a deceased individual receives periodic payments to compensate for lost wages and support the family’s future financial needs.

Annuities include things like:

  • Fixed Annuity: Offers guaranteed payments for a set period, providing a stable income stream in retirement.
  • Variable Annuity: Payments fluctuate based on the performance of underlying investments, suitable for those willing to take on more risk for potentially higher returns.
  • Immediate Annuity: This is purchased with a lump sum and starts paying out almost immediately, ideal for retirees seeking immediate income.

How to Sell Your Annuity Payment

Selling an annuity converts future payments into cash now. People do so for various reasons, including:

  • Paying off debt.
  • Funding a loved one’s education.
  • Managing financial strains from life events like divorce or a spouse’s death.
  • Covering medical bills.
  • Inheriting an annuity and needing funds to cover burial costs.

There are three ways to sell your annuity:

  1. A partial annuity sale means selling only a portion of your annuity payments, allowing you to get some cash upfront while still receiving future payments.
  2. A lump sum sale means selling a specific number of future payments in exchange for a one-time cash amount, ceasing those payments while keeping the rest of your annuity intact.
  3. An entirety sale means selling all your annuity payments, trading the entire value of your annuity for a lump sum of cash now, leaving no future payments from that annuity.

Usually, you’ll get about 60% to 80% of your annuity’s value in cash, though some firms might propose slightly different amounts. Comparing offers is key to securing the most favorable deal. Trustworthy firms will provide free quotes or estimates.

Taxes When Selling Your Annuity for Cash

If you’re under 59.5 years old when you sell your annuity, you’ll owe a 10% penalty. You’ll also have to pay taxes on the annuity’s gains. In other words, you won’t owe taxes on what you paid for the annuity, but you will on the rest.

Do I Get Cash Quickly After Starting the Process of Selling My Annuity?

Selling an annuity usually takes four weeks, including paperwork on the insurance company’s end. If you need the funds faster, some buyers offer cash advances.

Frequently Asked Questions About Structured Settlements

What is a structured settlement and how does it work?

A structured settlement is a compensation agreement resulting from a lawsuit in which the recipient receives periodic payments instead of a lump sum. This arrangement, often tax-free, provides a steady income to cover expenses like medical bills or lost wages, giving the recipient financial stability over time.

What is the difference between a structured settlement and an annuity?

Structured settlements are usually part of a lawsuit settlement, and annuities are bought from an insurance company as part of retirement planning.

Where can you sell your structured settlement payments?

You can sell your structured settlement payments to financial institutions or investment groups, also known as factoring companies. These buyers operate in a competitive, regulated market, offering cash in exchange for future payments.

What is a structured settlement discount rate?

A structured settlement discount rate is the percentage deducted from the total value of your future structured settlement payments when you sell them. It determines the cash lump sum you receive. The discount rate is negotiable, usually between 6% and 18%.

How much does it cost to sell a structured settlement?

Selling a structured settlement doesn’t involve upfront fees but involves selling at a discount rate, meaning you receive less than the total future value. 

How do structured settlement purchasing companies make money?

Structured settlement purchasing companies make money by buying your structured settlement payments at a discount rate and later collecting the full amount. Their profit is the difference between the purchase price and the total received over time.

What is a structured settlement company?

A structured settlement or factoring company specializes in purchasing structured settlements and annuities. They offer sellers immediate cash in exchange for their right to future payments.

Can I sell a portion of my structured settlement?

Yes, you can sell a portion of your structured settlement. This lets you access immediate funds while still receiving some future payments, maintaining a balance between immediate and long-term financial needs.

Structured Settlements Takeaways and Next Steps

Selling your structured settlement might provide the large sum of cash you need. But it’s crucial to understand all associated expenses before making this decision. If you decide to sell, compare quotes from at least three buyers to get the best terms.

If you have any questions, contact us today, and we’ll get back to you in one business day. 

We can help you find the best buyers and don’t charge you a fee or commission.

Sell your life insurance policy for cash.

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We’re here to help. Speak with a Policy Specialist today at +1 848-456-8333