Lump Sum Cash: The Legalese of Selling Future Annuities
You have an annuity, or are receiving monthly payments from a lawsuit settlement, but you don’t want payments. You want cash. The payments do allow you to keep an easy monthly budget, but you think you can invest this money and make more than what you’re getting now. It’s a risk, but you’re willing to take it. However, you’ve been told that you can’t get out of your structured settlement. It’s true that structured settlements (including annuity payments) are almost impossible to get out of – almost.
Cash For A Structured Settlement
Some companies exist solely to buy annuity payments. These companies are not traditional lenders. Instead, they act as an “exit” for people who want to get out of their current annuity agreement. The funding company pays a lump sum of cash in exchange for future annuity payments. Usually, the fee for doing this ranges from 10 percent to 40 percent of the amount being exchanged.
For example, let’s say you’re receiving annuity payments of $2,500 a month. You want to get out of this arrangement and receive a lump sum for the lifetime benefit of the annuity.
You find a company willing to buy your annuity, but they’re only willing to give you 80 percent of the total lifetime value of the annuity. The remaining 20 percent is their fee for the service.
Reasons For Wanting a Structured Settlement
One of the arguments against trading in an annuity for a lump sum is that the annuity provides certainty for the future. The entire reason for structured settlements is to provide you with guaranteed income for a set period of time – up to and including lifetime payments on some types of settlements.
When you accept cash for a structured settlement, you’re basically trading in a “sure thing” for a hypothetical future certainty. You had better be able to manage the funds properly, or you’ll end up running out of money.
Reasons For Wanting The Cash
On the other hand, sometimes receiving lump sum cash when selling an annuity is a good thing. For example, let’s say you get $1,000 per quarter from a lawsuit settlement. The reason you sued was because you were left handicapped.
You need to put in a wheelchair-accessible front entryway in your home. It costs, several thousand dollars. Rather than wait for several years to save up the funds, you choose to sell a portion of your annuity now to get the money you need for the renovations.
Legal Issues
Most courts frown upon lump sum buyouts because they rarely put the person receiving the money in a better position. It boils down to the fees and the trade itself. Structured settlements help people who tend to be spendthrifts – protecting them from blowing through a lifetime of savings before they die.
In most cases, a structured settlement is there to help pay the bills – you must prove that the buyout benefits you before a court will allow it. Even when a court does allow it, however, the insurance company that is making the annuity or settlement payments must agree to the buyout as well. You see, settlements and annuities are contracts between you and an insurance company. The insurer doesn’t have to agree to buyout, so both you and the finance company need to convince both the court and the issuing insurance company – no easy feat. Even if you are successful, expect the entire process to take about three months or longer to complete.
Melissa Rudd is a financial consultant and notary of many years. When she finds the time, she likes to help others by sharing her insights on the Web.
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Category: Insurance
