Structured Settlement is the legal arrangement of 1983 which is a unique form of settlement between two parties – the claimant who files a lawsuit against the other party, the defendant, for an injury claim or the workers compensation etc. in a structured way of receiving it in installments rather than as a lump sum amount. These installments can be variable depending on the agreement between the two parties like – a smaller annual amount for next 20 years or a larger amount per year for next 10 years etc. The amount for initial few years could vary from the installment amount for years thereafter to the extent that the claimant can also choose to have no payments for few initial years and fixed annual installments thereafter to fund retirement needs.
Factors that affect the Value of the Structured Settlement Payment
The structured settlement offers the claimant an option of selling his structured settlement right to receiving money in installments to another insurance company or some cooperation that deals in structured settlements in return for the huge lump sum amount, slightly discounted, to suit his urgent financial needs. Now a seller would always want to know how much money he can receive for his structured settlement. So, this amount he is entitled to receive on selling his settlement rights is basically affected by the following three key factors:
- The amount and the decided timing of the stream of payments mentioned in the terms of settlement agreement which the seller wishes to sell.
- The probability that the issuer of the settlement annuity will make the full payment on time. The issuer is generally the insurance company.
- The present economic and financial market conditions of the economy which affect interest rates and other determinants of the value of money in the economy.
It is usually seen that the lesser the time period of the receipt of whole of the settlement amount in the agreement, the higher purchase price the settlement agreement can fetch the seller. Thus all other factors being held constant, a settlement agreement of 2 years would be priced higher than the one that stretches over to 10 years.
Calculating the Structured Settlement Payment
The value of the structured settlement, i.e., its purchase price can be very easily determined keep in mind to incorporate the calculations of essential things such as the discount factor, time period of the settlement agreement etc. The following is the procedure to calculate the value of settlement payments in general:
Determine the Current Remaining Value – The Periodic Payment Settlement Act of 1982, ensures that the claimant receives a guaranteed income stream over the period of settlement agreed upon by the parties. So, the seller of the settlement must first subtract the amount/ part of the payments which have already been received by him.
Keep an eye for the Lowest Discount rate – The seller must then be on a lookout for the factoring company that offers the lowest or the least rate of discount for his settlement. A factoring company is the one that purchases structured settlements and the rate of discount depends on various factors such as the time frame of the settlement agreement and the risk of default of the insurance company in making full and timely payments on the settlement annuity. So, the seller would need to compare the discount rates of various factoring companies. The lower discount rate means the seller will be giving up lesser money for selling his settlement. So, an average discount rate of 8% to 14 % should be fine for the seller.
Calculating the lump-sum – Having obtained the low discount rate by factoring company, the next step is to multiply the current value of the settlement by the rate of discount to obtain a value which is lower than the value of the settlement. That could be taken to be the cost of selling the settlement.
The final decision – When a large amount is received in lump-sum, it is bound to attract the seller but the final decision must be made based on the final value calculated after accounting for the rate of discount and the actual amount which is needed by the seller to meet his financial needs. Sometimes the purchase price may not turn out to be sufficient for the seller in which case it may not be a very wise decision to sell the settlement. It must be noted that the lump sum amount is received only once but then they offer no flexibility to claimant in terms of receiving the payments. Thus, they are prone to fall into wrong investment avenues as a result of poorly made investment or spending decisions by the claimant.
Precautions to take while Selling of a Structured Settlement
It is important to keep in mind throughout that Structured Settlement is a source of a guaranteed income stream with the freedom to spend the money as per the claimant’s desires. If he still wishes to part with this tax-free option for the lump sum amount to fund his urgent financial needs, the claimant must take the fallowing precautions very seriously in order to avoid getting duped by receiving lesser money than the settlement could have fetched:
- Be very sure of why you would want to sell your settlement agreement. Selling a tax-free settlement for acquiring any asset that either depreciates in value or does not promise to offer assured returns would be a very poor financial decision that must be avoided to keep losses at bay.
- It is very important that the claimant thoroughly weighs the pros and cons of selling his structured settlement before deciding whether he would sell the whole settlement agreement or just a part of it because his net returns would vary as the tax laws would no longer apply on the lump sum amount he invests after selling his settlement.
- Have complete knowledge of the authenticity of the company that deals in structured settlements and from whom you wish to get quotes for your settlement. Also, the company may charge fees for its services which should also be added up as a cost of selling the settlement.
- The claimant must keep himself safe from getting trapped by false advertisements or claims of any entity that offers full amount lump sum payment for the total value of settlement agreement. It is not possible and no company would to it in reality.
- The claimant must always seek to get his transferring the right of future receipt of money to the company, authorized by the courts judge stating the reasons for the same. Since the whole process is done legally, it is now a law that needs the factoring company, which is buying the settlement from the claimant, must mention explicitly about any previous sales of the structured settlement with complete details of the same. This law is the New York’s Structured Settlement Protection Act effective from January 1, 2011.
- It is always wise to involve an attorney for the process of selling a structured settlement to avoid getting into any legal hassles later. The cost of hiring a lawyer would save the other costs if the claimant is fooled by false claims of the factoring company. This the claimant must be very sure about selling his tax-free settlement and must proceed only in accordance with legal rules laid down under the laws of his respective state.