by John Darer CLU ChFC CSSC RSP CLTC
The pitch line from a company that buys structured settlements "By having the cash of your future payments in your hands today, you may lose possible future value but you have an opportunity to use it now where it may be helpful for your well being. The result is you will have a lump sum of cash at its present value".
The potential benefits of cash are perhaps more relevant to allocation of settlement money at the time of settlement. For example:
- You could invest in a business that gets a higher return on your investment than the level it would get in an investment.
- The purchasing power it holds today.
- You may buy a home where, instead of paying rent every month, the money you spend living there builds equity overtime and the value of the home will increase over that time.
- You may purchase a car where now you can get a better job, make much more money over time than you would if you had to take the bus or the subway.
First of all, the overwhelming majority of people do not actually sell their structured settlement payments despite the bombardment of offers, according to information published by J.G. Wentworth, the largest and most well known purchaser of structured settlements.
While life changes sometimes bring valid reasons to sell your structure settlement, Selling all or part of your structured settlement is a decision that must be the result of sober thought.
- When it comes to purchasing power, what are you going to buy? Would you accept a pay cut from your job so you could have a big screen TV or a new motorcycle?
- When it come to investing in a business, what experience do you have? Have you written a business plan or have you seen a business plan? Consider the failure rate for new businesses and why they fail. The failure rate is so high that Harvard Business School estimates 95 percent of new businesses fail if failure is defined as failure to meet a set projection. This rate falls down to 70-80 percent if failure is defined as inability to get adequate return on investment. The rate goes down further to 40 percent if we define failure as investors losing all or most money put into the company. A March 7, Harvard Business School publication said that most start-ups fail due to lack of foresight, lack of wiggle room in the business plan, bad timing, or lack of funding. Furthermore too much funding for an unstable business model can take what would have been a small failure and turn it into a huge one. Are you aware of all the costs? Have you a contingency plan for income to replace the structured settlement payments you are thinking of selling. I don't want to stifle your ambition, but the risk should be evaluated, well before entering into a contract to sell/
- There is no guarantee that a home will increase in value. Moreover, one must not overlook that owning a home brings responsiblities of home ownership. This means that property taxes must be paid, the home must be maintained, and many services that might be provided by a landlord (garbage pick up, gardening and landscaping, tree service) must now be paid for by you. Selling a future income stream to simply raise a down payment, without considering the above could lead to an unpleasant financial outcome.
- Buying a car might be a valid reason if you have no other resources, but there is no guarantee that a car will get you a job that will pay you much more money. If you are ambitious, work hard and excel at what you do you will be able to earn more, pay your bills on time,improve your credit and have greater purchasing power.
The settlement purchaser states "The equivalent value of money for either present values or future values is simply determined by a mathematical equation. Use both hemispheres of your brain when comtemplating selling structured settlement payments.