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.
Discount Rates
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.
Total Transparency
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
Contract Language
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
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