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Structured Settlements: Cashing in For Lump Sums
If you're reading this article, chances are you've recently received some sort of settlement from an insurance company and it looks more like a prolonged paycheck than the lump sum of money that you were hoping for.
You see, it's much more palatable to companies that are governed by balance sheets, cash flow analysis, and capital to make a series of small payments that don't affect any one report in a major way than to slap big money on the table up front. So we have something called structured settlements, which is a way for insurance companies to agree with you and the court officials that they will compensate you over a period of time.
This type of compensation has several benefits. First, it guarantees that you won't blow through the money in one fell swoop, leaving you left with nothing to cover the bills you're inevitably going to have to pay in the future.
Second, it keeps your money hungry friends and relatives away from you since you don't have access to a pile of money that you can 'loan' them for their next big idea. Third, the payments can be arranged in a way the keeps you from paying state and federal income taxes on them. That's a huge benefit that compounds over time.
There's one problem, though. Sometimes you need a lump sum of money for big expenses, and I'm not talking about a fishing boat or an ATV. We're talking something like a house, huge medical bills, student loans, and so on.
So what are you supposed to do if you need the money now instead of in 5 years? Simple. There is an entire industry that revolves around paying you money up front for guaranteed future earnings. For some upfront interest, you can sell all or part of your annuity stream and get a lump sum payment in return.
There are several pitfalls to this, both in results and process. I touched on the results portion above, but let me reiterate. They're going to charge you money for this transaction, and you need to shop around to find the company that will both follow through on what they promise and also charge you the least amount of "interest". It's technically known as the discount rate in net present value calculations, but that's the subject for another article.
The second pitfall is the process itself. In most cases a judge has awarded and approved of the structured settlement, so a judge has to undo it and re-award it. It's not impossible, but it's a lengthy procedure that you should be ready for.
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