Understanding the Costs of Selling Your Structured Settlement
The cost of selling a structured settlement can vary greatly depending upon how your original settlement was set up as well as which selling company you contract with to manage the sale of your structured settlement.
Because the structured settlement industry is largely unregulated, you will want to do your due diligence to protect yourself against paying too high of a discount rate to the factoring company that will be purchasing your settlement. This may be one of the biggest financial decisions you make in your lifetime, so we highly recommend you understand the terms associated with the cost of selling your annuity as well as understand the steps you should take to secure a fair price from a trustworthy purchasing company.
What Is a Discount Rate vs. an Effective Discount Rate?
Basically, a discount rate is the percentage of your total lump sum that you will pay your purchasing company for their services.Think of this as being similar to the interest you pay, say, on a car loan or credit card.
When shopping for a structured settlement buyer, be sure to ask the representative (online or by phone) for the discount rate AND effective discount rate. Though you will hear both terms, you will be more likely given only a discount rate in the quote. The effective discount rate covers legal and court fees, the commission owed to any brokers, payments to your current investment company, as well as any other miscellaneous fees that may occur (administrative, processing, etc).
The bulk of the cost of selling your settlement will be the discount rate, which will vary greatly by company. Quotes can range from 7% to as high as 29%. Expect many companies to offer a high discount rate in their initial quotes. Do not accept the initial quote from any company. It is standard practice to negotiate with the company’s representative to get a lower rate. We also recommend that you receive quotes from at least three companies, and that you choose a company that offers a fair rate at or around 7%. If a company will not go below 10%, then keep shopping.
Calculating a Discount Rate
Because this process can be daunting, here’s an example of a company who offers a high discount rate versus one that offers a rate of 7%.
Mary has chosen to go with Company X who has offered her a 25% discount rate. Mary’s structured settlement payment is $120k. Mary would pay out $30,000 and only receive $90,000. If Mary went with a company that offered her a 7% discount rate on the same settlement amount, Mary would pay a discount rate of $8,400 with a settlement amount of $111,600. As you see, Mary receives a significantly higher amount in her final payment with the lower rate. In other words, don't focus just on what you will receive in the settlement, but also on all associated costs.
What Steps Do I Take to Save Money When Selling My Structured Settlement?
We highly recommend the following steps to ensure you save the most money as well as receive the best rate and services when selling your structured settlement.
Understand Your Current Settlement: The first thing you will want to do is understand your current settlement, most importantly, its cash value. We recommend you contact your financial advisor who can work with you on determining current value. Additionally, read your contract to ensure your settlement is transferrable and to see if there are any charges or fees you may be responsible to pay back to your current lender for establishing and holding your plan.
Seek Independent Professional Advice: We strongly urge you to seek both legal and financial council, either from your attorney and financial advisor or preferably from professionals who specialize in selling structured settlements. This may add some additional cost but in the long run this could save you time, money and heartache.
Shop Around: The next step is to shop around. Stay away from any structured settlement companies who advertise big payouts and offer too good to be true promises. We want you to work with a trustworthy selling company that will offer you a fair discount rate, and that will have your best interests in mind. Take your time with your selection, do your homework, and get support from independent professional advisors when you need it.
If you are ready to sell your structured settlement, please see our Top 10 Structured Settlement Companies today!