You’ve decided to explore the possibility of selling your future structured settlement payments to help you out of a financial bind. Chances are, you reached a point in your research and realized that it’s impossible to get the full face value for those payments. But you might not be getting a straight answer as to why you won’t get every dime from the sale, even though they are your payments. This post breaks it down.
A structured settlement “sale” is actually a transfer of rights.
First, it’s important to know that selling your structured settlement works differently than you might hope. It’s not like selling your car and handing over the keys when you get your check. When you “sell” your future structured settlement payments, you are really transferring the rights to those future payments to someone else in exchange for a lump sum of money now. They are purchasing the right to the future payments.
Why does it work that way? It’s impossible to reverse the agreement that established your structured settlement to instead get all your money at once. Because of the court’s involvement originally, transferring rights to your future structured settlement payments is the only way to get cash now. (And that process can only happen if the court decides it’s in your best interest - more on that here.)
How much you’ll make on the transfer is the payments’ present value, which is lower than their face value.
Face value refers to the total amount of your future payments, regardless of when they are made. For instance, if you get $10,000 a year for 10 years, the face value of those payments is $100,000. But in every transfer, there is a discount rate, in the form of a percentage, that applies to your money. The discount rate represents how much your future payments will be discounted on a yearly basis to determine their present value, which is the amount you’ll get from the transfer.
Why does the payments’ value have to be discounted?
First, consider the simple inflation effect -- the decrease in purchasing power, and therefore real value, of money every year. If inflation is at 3%, then each year you lose 3%**. So, just from inflation over 10 years, your $100,000 in face value is really only worth $85,121.24 today. In this case, you actually have an asset worth about 85% of the face value! If you spread that same amount over 20 years by getting $5,000 a year, it really is only worth about 74% of the face value today.
If you decide to sell structured settlement payments, the people who are interested in buying them would want to make a profit on top of the inflation adjusted value. So, they need to make more money in today’s value than what they are paying you. They will further discount the inflation-adjusted value of your payments to ensure they get a return on their investment. (You wouldn’t loan me $1,000 for ten years without wanting interest, right?) The result is the present value: how much someone would pay for those payments. This will always be less than the inflation adjusted value and therefore always less than the face value.
So, the face value of your payments will always be significantly higher than the purchase price an investor is willing to pay.
Tip: Shopping around for discount rates helps you keep more of your money.
Here’s a rule of thumb: When you sell your future structured settlement payments, the lower the discount rate, the more money you get to keep.
Discount rates can range from 6% to 12% among companies that facilitate these transfers. At CrowFly, the average discount rate on transfers executed through our platform in 2020 has been a remarkable 5.76%*. (Remember, the lower the rate, the more money you keep, so we are proud of the outcomes for our customers that this represents!) That’s why it’s helpful to get a few quotes on discount rate before deciding which company to use for your transfer -- because there can be a HUGE difference in how much money ends up in your pocket.
We invite you to give us a call at 833-CROWFLY or email firstname.lastname@example.org to have a conversation with a real person about our discount rate and what you can expect in the selling process, with absolutely zero pressure to use us. You can also try our free structured settlement calculator to get an estimate of how much you’ll get for selling your future payments (we can often use our network of buyers to beat the initial estimate).
Or, if you’re ready to try us out, click:
*If inflation is 3% your payment one year from now is worth $10,000/(1.03) or $9,708.74 today. The one two years from now is worth 3% less than that or $10,000/((1.03)*(1.03)) [also written as $10,000/(1.03)n ] or $9425.96. To get the total present value for the full amount, you do this calculation for each payment and then add up the total to get $85,121.24.
**This discount rate has been our average on transfers filed in 2020. CrowFly's 12-month average is 6.01%. However, it does not mean that we always achieve a discount rate this low. The timing and details of payments, as well as demand from buyers, affect achievable rates.