Before you consider selling a structured settlement, you should understand why you wound up with a structured settlement in the first place. Most settlements are structured for very good reasons that rest on sound money management principles. But other people are put into structured settlements because it suits the interests of insurance companies and lawyers. Regardless, you should always consider whether your personal financial and medical circumstances have significantly changed since the structure was put into place.
The only people who should even think about selling a structured settlement are those 1) who were pushed into them for reasons that have nothing to do with sound money management and long-term financial needs, or 2) whose circumstances are now so different that a structure that once made sense is no longer in their long-term best interests.
Imagine this hypothetical scenario in which a young man gets a structured settlement for very good reasons, is tempted to sell it, but in the end decides that it's wiser not to.
Case Study: A Structured Settlement That's Good for Life
David, a 19 year old clerk at a convenience store, is struck by a car as he leaves work and severely injured. Following multiple surgeries and a month-long hospital stay, he will need years of physical and occupational therapy, expensive medical equipment, and modifications to his home. It's likely that he'll never be able to work again, or that if he does, he will have to be retrained to enter a profession other than in the retail industry. The driver of the car that hit him is clearly at fault and has $100,000 of liability coverage on his auto insurance policy as well as a $1 million umbrella policy. David's existing and future accident-related medical bills are estimated to top $700,000 over his lifetime. His loss of earning capacity is estimated to be over $600,000 over his lifetime. And then there's damages for his pain, suffering, scarring, disfigurement, mental anguish, and disability. The lifetime costs of his catastrophic injuries will clearly exceed the $1.1 million in available insurance.
David's lawyer is concerned about his ability to manage a lump sum of cash. He's of average intelligence, but he lives paycheck to paycheck and knows nothing about long-term money management. His lawyer also picks up hints that his girlfriend is unnaturally interested in the potential settlement coming his way. Then too, David's father is fairly poor, on public assistance, and has let it be known that he's expecting some cash from any insurance settlement.
Because of these concerns, and because David's lawyer has a duty to protect her client's best interests, she begins to talk to her about a structured settlement. She convinces David that getting a modest lump sum up front followed by regular annual payments will ensure that as he gets older, he'll be able to afford a place to live that will be adapted to his disabilities and will be able to afford good medical care. David will also be rid of the temptation to blow all his money at once. The lawyer also points out that if David gets a lump sum settlement, a large portion of it will go toward his existing medical bills, but if David takes a structured settlement, he will have more leverage in negotiating down the medical bills he owes.
Persuaded by his lawyer's advice, David opts for a structured settlement. And he does so for good reasons.
As he gets older, David sees commercials on TV for companies that buy people's structured settlement. He's tempted, of course. A big chunk of cash would be great! He could buy a new car to replace his beater. He could help out his mother. He could buy himself some of the nicer things of life. Sometimes, he thinks of all the pain he's gone through since the accident and feels like he deserves to have these things.
Still, despite the temptation, he isn't persuaded by the ads for structured settlement buyout companies. The annual payments he receives make his life easier and he has the peace of mind of knowing that he will have an income he can use to take care of himself for the rest of his life. David also knows himself pretty well and thinks if he had a whole lot of money at his disposal, he'd probably just spend it on things he doesn't really need.
Case Study: A Structured Settlement That's Better Sold
Some structured settlements, however, have less to do with the recipient's best interests and more to do with the needs of the insurance company that pays out the settlement and the lawyer who represents him. Here's how that scenario plays out.
Louise is a 29 year old electrical lineman with a utility company. She has an Associate's degree in Energy Distribution Systems and is attending college part-time to become an electrical engineer. She makes about $70,000 a year. One night, while she's walking home from an evening out with friends, she's hit by an SUV and sustains serious compound fractures of both legs. There is a serious question about whether she'll walk again, let alone resume her career as a lineman.
The driver of the SUV has $1.1 million in total coverage. It's clear that Louise's total damages will easily exceed that. However, while it looks like the driver of the SUV was driving too fast when he hit Louise, the evidence also shows that Louise had been drinking before the accident and may have been walking closer to the center of the road than a reasonably prudent person would have. Louise's lawyer thinks it's more probable than not that she would win the case if it came to trial, but he also knows that it's not a sure thing. Further, Louise's own conduct might be deemed comparative negligence, which would substantially reduce whatever damages she might be awarded at trial.
Meanwhile, over at the SUV driver's insurance company, the people in charge are not happy about paying out $1.1 million all at once. It's been a rough year for the company, what with hurricanes that caused tens of millions of dollars of damage to their insured's houses and a major ice storm that resulted in thousands of motor vehicle accidents. The insurer would much rather spread Louise's payments out over time so that their cash reserves don't take a huge hit, potentially resulting in a downgrade by the insurance rating agencies.
As the trial date approaches, settlement discussions heat up. Louise's lawyer demands $2 million cash, $1.1 million of which would be paid by the driver's insurer and $900,000 of which would come from the defendant's pocket. The insurer offers a structured settlement with a $500,000 present value. Negotiations are difficult. The driver's lawyer argues that Louise would probably lose at trial, or that the jury would assign a substantial amount of comparative negligence to her. Louise's attorney argues that if they don't settle the case, the driver could be exposed to a substantial personal judgment against him well in excess of the policy limits. And Louise's lawyer insists on a cash settlement.
After much negotiation over several days, the driver's insurer makes what appears to be a final pretrial offer. It offers to settle the case for $1.1 million, the full extent of the available insurance coverage. But the offer is contingent on the payout being structured so that $425,000 is paid up front while the balance of $675,000 is paid out over 20 years.
Louise discusses the offer with her lawyer. She retained her lawyer on a contingent fee basis, which says that the lawyer gets paid only if Louise gets a settlement or a verdict in her favor. The contingent fee agreement calls for the lawyer to receive one third of any settlement reached before trial, but 40% any damages awarded by the court if the case goes all the way to trial.
Louise's lawyer points out to his client that they might well lose the case completely. Furthermore, the only practical way to force the defendant to pay money in addition to his insurance policy limits would be to get a judgment against him in excess of $1.1 million. But in that case, as the lawyer points out, her fee would be significantly higher, so Louise might actually wind up with less money in her pocket. Further, collecting additional money from the defendant personally would be difficult and possibly fruitless, since he has no substantial assets to his name.
There's another factor at work in this discussion, one that's not spoken aloud, but is present in the back of Louise's lawyer's mind. He's put in many, many hours on this case. If Louise refuses the settlement and the case goes to trial, there is a chance that she will lose, in which case the lawyer will not be entitled to any compensation for all his work. He's not supposed to think this way. In fact, it may be a violation of the attorneys' canons of ethics for him to think this way. But lawyers, believe it or not, are human.
Louise's lawyer decides to recommend that Louise take the settlement as offered. After much discussion, Louise agrees. But in this case, the structuring of a portion of the settlement had little to do with Louise's needs, and more to do with the needs of the insurance company and Louise's own lawyer.
A few years after the settlement is accepted, Louise has made significant medical progress. She's able to walk with only a slight limp. And she's able to resume her work, with only minor physical limitations.
Louise wants very much to complete her Electrical Engineering degree and go on to get either a Master's or a Doctorate in the subject. But that will require a lot of money. She sees ads for companies that buy out structured settlements and answers one. She understands that she will be giving up some of long-term net value of the settlement if she sells her settlement. But she needs the money now to proceed with her studies and, hopefully, advance to a higher-paying professional job. She sells his settlement for a lump sum that's sufficient for her to fund her educational goals.
Two People, Different Decisions
Louise and David got their structured settlements for two different reasons. And their circumstances, while once similar, are no longer the same. Appropriately, they come to different decisions on whether to sell their structured settlements.
David decided to keep his structured settlement because:
--he has ongoing and expensive medical issues and is unable to work full time;
--he has no other significant source of income;
--he wants a graceful way to decline to give cash assistance to his father or his girlfriend;
--he knows himself well enough to understand he'd be tempted to blow a big chunk of money; and
--he doesn't want to give up a significant portion of the value of his settlement to enrich a financial services company.
Louise decided to sell her structured settlement because:
--she really wasn't a great candidate for a structured settlement in the first place;
--she no longer has significant medical issues or expenses and is able to work full time;
--she has a good job in a promising field where she can advance if she furthers her education;
--none of her friends or family members are pestering her for money;
--she has demonstrated the self-discipline needed to manage a significant chunk of cash;
--she is willing to sacrifice a portion of the value of her structure now for the chance to improve her career prospects and potentially earn more money in the future.
So long as both David and Louise have wisely and accurately planned out their immediate and long-term needs, neither one of them has made a wrong decision.