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Tuesday, 18 June 2019
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Why Investing a Lump Sum from a Structured Settlement Sale Makes Sense

Written by Posted On Wednesday, 12 June 2019 19:00

If you've recently received, or are expecting to receive, a lump sum from a structured settlement sale, you will probably have a few options ahead of you. These can probably be split between spending your windfall or investing it in some way.

This article reviews the structured settlement concept, including the advantages of opting for a lump sum from the outset. It then looks at the process of getting cash from structured settlement arrangements through the secondary markets and finishes by weighing up the pros and cons of investing that lump sum. In almost all cases, as you will see, investing is the wisest course of action.

Reviewing the structured settlement concept

Although this article is aimed mainly at those who are selling their structured settlements, we understand that some readers may be going through a lawsuit right now and might be considering whether to opt for a lump sum or structured settlement arrangement. Is there any point in having a structured settlement if you are only going to sell it later on in life?

During a lawsuit, your attorney will have your best interests at heart and will be weighing up several factors to decide whether a lump sum or structured settlement is in your best interests. For example, if your award is likely to be $150k or lower, a lump sum is normally the most sensible option. However, if you have between 40% and 100% disability and are expected to get a payout to cover future medical costs, a structured settlement is usually the more secure set up.

That doesn't mean that your structured settlement will always be suitable for your needs because nobody can predict the future. That's why so many people decide to sell their structured settlements on the secondary market.

Structured settlements are like molten metal. They can be shaped into almost infinite forms at the outset but when they set they are secured by law and can only be sold on – never changed. Some structured settlements start immediately (e.g. to cover ongoing medical expenses) while others start in the future (e.g. to cover early retirement or a child's college fees). Periodic payments can be monthly, quarterly, annually or a combination of these. They may be interspersed with occasional lump sums (e.g. every five years for predicted wheelchair replacements, etc.)

Some structured settlements will take the form of a life contingent annuity, with benefits ending at the claimant's death (unless arrangements have been made to continue payments to a spouse) while others (called 'period certain' annuities) will be guaranteed for a certain amount of time.

Lump sum settlements versus structured settlements: two main considerations

Sticking with ongoing lawsuits for the moment, how does the award of a lump sum versus a structured settlement affect the finances of the claimant? The two main considerations are tax and financial management.

All structured settlements are tax exempt but this exemption does not apply to any earnings made from investing a lump sum. So when comparing the interest you might expect to receive from investing a lump sum with the total sum of payments due under a structured settlement contract, be sure to factor in the impact of tax.

In terms of financial management, you should be honest with yourself about how savvy you are with your finances. While an accountant can guide you to making the right choices for your goals and risk appetite, there is the simple fact that large sums of money are a temptation. If you can't trust yourself not to blow the cash on a new designer wardrobe or a top of the range sports car, you might be best opting for a structured settlement if you have the choice.

How to sell structured settlements

Most people reading this article will already be tied into a structured settlement contract and have either sold it or are interested in doing so. This section is for those people asking, 'how do I go about selling my structured settlement payments?'

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First, you should get some legal and/or financial advice. This might be from your accountant, an attorney or even the attorney who dealt with your initial lawsuit. They will be able to confirm whether the sale is in your best interests and whether you should sell part or all of your future payments. If the deal is not in your best interests, there is no point pursuing it as the judge will likely deny the transaction anyway, wasting everyone's time.

In many cases, the beneficiary's situation has changed enough so that the initial structured settlement has become a burden. In this case, you would contact a structured settlement broker or seller to begin the transfer process. The discount applied to the lump sum you will receive can vary wildly between buyers so don't jump at the first offer you get.

When you have decided on a buyer, they will liaise with you, the paying insurer and the judge to ensure all necessary forms are filled in and a date set for meeting the judge for the final decision.

The advantages of investing a lump sum

 

So whether you have been awarded a lump sum in lieu of a structured settlement or are selling your structured settlement payments, you have three choices: spend, save or invest.

For many people, investing means speculating in the stock market or, for many of our readers, real estate. The advantages of this type of investing include:

  • You can choose a risk profile to suit you
  • You can spread risk by building an investment portfolio
  • You can choose relatively secure investments such as real estate, government securities or index-linked funds
  • The rate of return is almost always higher than that provided by a standard savings account

However, some types of expenditure may actually be investments in disguise. For example, starting a business or enrolling on a course has the potential to increase your net worth. You are actually investing in yourself.

If you decide to do up your home in a way that adds value to it, you are also investing. Paying for a child's college fees is an even longer term investment as they will likely achieve financial independence sooner and may even be in more of a position to care for you after you have retired, particularly if you have long-term health problems.

Another advantage of investing a lump sum is that it prevents you from spending it. This can be reason enough for those who find it difficult to resist the many temptations in life.

Are there disadvantages of investing a lump sum?

Taking the expanded view of investment above, the only way you will not be investing your lump sum is if you save it in a standard interest-bearing account, keep it under the mattress at home or spend it on things which depreciate or are simply consumed: most cars, holidays, clothes, jewelry, champagne, expensive foods, etc. Choosing to invest your money instead of spending it may mean you have to forego some of these luxuries. Although this can seem a disadvantage at the time, the long-term security you get from wise investments is almost always worth it. An exception could be high-interest debt as there is little point in earning interest through investments and then paying the same – or more – in debt repayments. In this case, it is normally wisest to pay off the debt first.

There is also clearly a disadvantage in making high risk investments which ultimately fail. You should always balance your portfolio with more secure investments and take financial advice if you are unsure. The lowest risk option is to put your money in a savings account but the interest rate is closely tied to the economy so you will never outperform inflation by much.

Therefore, in most cases, investing a lump sum from a structured settlement sale makes the most sense as it is the most profitable course of action.

Author Bio

Kathy is a financial adviser and blogger. In her blog, she addresses various structured settlement issues including how buying and selling structure settlement payments work. She is associated with Catalina Structured Funding, Inc., a company that provides customers with most cash for their structured settlement or annuity. Buzz her on twitter to discuss your situation.

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