Structured settlement buyouts: What they are and how they work

If you’re in need of immediate cash, you may be tempted to turn to your structured settlement fund and take all the proceeds at once. Before making such a big decision, consider the pros and cons. You’ll pay a fee to cash out, potentially jeopardizing your future financial security. But if you need money now, cashing out may be the best option.

What is a structured settlement?

A structured settlement is a large amount of money given as several periodic tax-free payments over a predetermined period of time. They are often used to provide a settlement for personal injury claims or other civil lawsuits. Structured settlements are meant to provide financial security to their beneficiaries.

Typically, both parties can choose whether they agree to a lump-sum payment or a structured settlement. When a structured settlement is used, the at-fault party puts the payment into an annuity. An annuity is a financial product provided by an insurance company that makes guaranteed payments regularly over time.

How cashing out a settlement works

Structured settlements are the source of about $10 billion in annual payments to more than 30,000 recipients each year. These payments are tax-free and the income does not impact eligibility for other government programs like Medicaid or Social Security disability benefits.

Recipients often consider cashing out their structured settlement entirely when an emergency occurs or there’s a need for a substantial sum of cash.

“Things like medical emergencies, car troubles, home repairs, tuition payments, investment opportunities, business capital and debt are just a few of the common reasons that we see customers reach out to us looking to access a lump sum payout,” says Brian Lawlor, senior vice president for structured settlements with J.G. Wentworth, one of the country’s largest buyers of structured settlement payments and annuities.

Cashing out a structured settlement typically requires working with settlement buyers or factoring companies. These companies specialize in buying settlements and providing a lump sum cash payout. When selling, you can liquidate the entire settlement or just a portion of your upcoming payments.

“A recipient may just want to get a few months’ or years’ worth of payments immediately, and then revert to the original schedule,” says Michael Sullivan, a personal financial consultant with Take Charge America.

When contacting a buyer like J.G. Wentworth, a company representative will review your settlement fund, the amount of your monthly payments and current financial needs and offer two or three different buyout options.

Court review

Cashing out a structured settlement typically requires a judge’s review and approval before finalizing the sale. “Once an offer is accepted, the settlement company will file a petition in court to transfer the structured settlement,” says Steve Sexton, CEO of Sexton Advisory Group. “The judge has the final say.”

When reviewing the sale, a judge will typically consider your living expenses, life expectancy, and future financial needs. This process can take anywhere from 45 to 60 days.

Cost to cash out

Cashing out all — or a portion — of your settlement payments is not free. While many settlement buyers won’t charge you a direct fee, they will buy your monthly payments at what’s known as a discount rate. In other words, the sale is not a dollar-for-dollar exchange. You will not be paid the full amount you would have received for each of your future monthly installment payments.

“If the cash settlement company moves forward, they will offer the payee an upfront sum to surrender the payment stream along with a discount rate,” says Sexton. “The discount rate ranges between six percent and 29 percent.” You can negotiate the specific rate, but they are not take-it-or-leave-it offers, Sexon adds.

Before accepting an offer from a company, it’s a good idea to shop around to get the best deal possible.“Not all companies are equal and a seller should request at least three offers before selling,” says Sullivan. “Often smaller buyers will pay more since they have fewer costs, but that’s not always the case.”

Pros and cons of a settlement buyout

Choosing to cash out your settlement can be helpful if you need a lot of cash now. However, it comes with some significant drawbacks — the high cost of a settlement buyout being a big one.

Advantages of cashing out your settlement

While there is a cost associated with cashing out a structured settlement, it also presents potential advantages:

• Lump sum to cover significant expenses: Liquidating a structured settlement and taking a single payout can help you cover costs you otherwise would have needed a loan for. For example, you can use a settlement to cover the cost of college tuition, a wedding, home purchase or medical expenses.
• Ability to clear up debt all at once: If you have substantial debts, cashing out a settlement may provide the funds needed to help pay off outstanding balances. “By cashing in a settlement, a person having financial problems might get the liquidity they need to resolve their financial issue,” says Sexton.
• Peace of mind: It’s no secret that debt and money shortages cause stress. Eliminating debt or using a structured settlement to cover the costs of major life expenses — rather than taking out loans or using credit cards — can provide you with peace of mind.

Disadvantages of cashing out your settlement

Before cashing out your structured settlement, understand that the process won’t be immediate and that you could lose both money and long-term security.

• Losing money: Settlement buyers pay a discount rate for your monthly settlement payments, meaning you forfeit a portion of the settlement money you could have received. “Some structured settlement companies charge 25 percent to 50 percent of the payment amount to be received.” says Sullivan.
• It’s not immediate cash: It takes a little time to get your structured settlement cash. Typically a court review and approval of the sale is required. “The transfer can take anywhere from 20 to 45 days or more to complete,” says Sexton.
• Loss of long-term security: Structured cash settlements provide a steady and reliable stream of cash often over several years or even for the remainder of your lifeHaving the money distributed in increments, rather than cashing out, protects you from making big splurge purchases or using the money up quickly.

Alternatives to cashing out a structured settlement

If you need money now, cashing out your structured settlement isn’t your only option. Consider these alternatives:

• Personal loans: With good or excellent credit, you can qualify for a personal loan. Getting a personal loan means you get a lump sum of cash all at once, but you will need to make monthly payments to pay back the loan.
• Low-interest credit cards: If you don’t need a large amount of money all at once, you can look into low-interest credit cards. This allows you to have a revolving credit line that you can reuse as you pay it back. 
• Using your home equity: If you own a home and have enough equity in your home. You may be able to get a home equity loan, HELOC or do a cash-out refinance.

The bottom line

Cashing out a structured settlement can be a good way to access a significant amount of cash. But before making such a significant decision, review all of the costs carefully. If you decide to proceed with a sale, get offers from at least two to three different buyers to ensure you’re getting the best deal possible.