A structured annuity or settlement offers annual or monthly payments to provide steady income for a specific period of time. These settlements, which can be associated with disability, life insurance, or an accident, can protect your quality of life and guarantee future income, but sometimes a structured settlement isn’t enough to keep up with the cost of living or a financial hardship.
If you are receiving a structured settlement or annuity, you likely have the option of selling your settlement in exchange for a discounted lump sum of money. Before you do so, make sure you carefully consider these four factors.
1. Are you comfortable with budgeting and discipline?
A structured settlement can provide guaranteed and steady income for decades which makes budgeting for retirement easy as you know precisely how much you will receive every month. Opting to sell your structured settlement and receive a lump sum takes away this predictability. If you aren’t disciplined with your spending, the lump sum can also introduce risk as you may accidentally squander the money in a short amount of time.
2. A lump sum of money may have tax consequences
Depending on the size of the lump sum you receive, you may be pushed into a new tax bracket which increases your tax liability. The money you receive from an annuity or structured settlement, however, is rarely taxable.
3. Do you have a real need for a lump sum?
While selling a structured settlement comes with risks and a reduced amount of money, sometimes it makes sense. Carefully consider your reasons for selling your annuity or structured settlement before you make a decision. If you need the money for a real financial emergency, such as paying for medical care, taking a lump sum can make sense. Just be sure the financial emergency really is urgent and necessary. As an alternative, you may be able to borrow against your future settlement payments or even borrow against an existing life insurance policy with fewer risks and costs.
4. Don’t underestimate the transaction costs you’ll face
As you probably know, the lump sum you receive when you sell a structured settlement will be less than you would receive from the settlement over time. Even though you may receive a significant amount of money upfront, make sure you calculate just how much you will give up. As a general rule, you may lose anywhere from 8% to 20% of your settlement. It’s a good idea to carefully compare your options as costs can vary significantly among factoring firms.