Life after Selling Annuity or Structured Settlement Payments

Most people begin the selling process with a specific need in mind. With money in your bank account, you finally have the resource to address a variety of financial dilemmas. When a pressing debt or emergency cost demands attention, people discover that funds locked in their structured settlement or annuity offer a solution, allowing them to move forward.

Page Contents

Using Your New Resource

The judge ruled in favor of you selling your payments, you’ve signed paperwork and a check is in the mail. What’s next?

The majority of sellers use their cash to:

  • Make a major life purchase (house, car or business)
  • Pay for a divorce
  • Pay off credit-card debt
  • Pay off medical bills
  • Pay off a student loan

You get to use this money for whatever you want, but know that how you spend it has repercussions for your future financial well-being. The best decisions are ones that ensure that the sacrifice you decided to make – giving up long-term income for money now – pays off.

Making a Major Life Purchase

At several points during our lives we have to make a significant purchase. That means parting with a lot of money – and making a decision we’ll have to live with for years. This is when we have to find a car or buy a house (or condominium or townhouse) and when we need to find the right business to own.

The emotional part of the decision is one thing. Making sure the purchase is a wise one is another. Some fast facts:

31

Buying a House

The average first time home buyer is 31 years old

California Association of Realtors
9.4

Buying a Car

The average number of cars bought in a lifetime is 9.4

30K

Starting a Business

The average cost of starting a business from scratch is $30,000

Kauffman Foundation

Buying a House

Home Buying Facts

  • The average price of an existing home is $188,000 (National Association of Realtors)
  • From 2009-2013, 64.9 percent of the U.S. population were homeowners (U.S. Census Bureau)

Home Ownership

Whether you’re single, married or starting a family, going from a rental apartment, condo or house to a home that you own is a big step. Culturally, it symbolizes a move to adulthood. Realistically, it means you’re putting down roots and making the call to build equity. After years of paying rent with no slice of ownership, home ownership means having something tangible to sell when your next move comes.

Down Payment on a Home

The greatest single obstacle to buying a house is that banks almost always require a down payment, thousands of dollars. The amount is a percentage of the price of the house, and the exact percent depends on the type of loan you secure. The lowest down payment is usually 5 percent, and most loans ask for 10 percent down. If you can cobble 20 percent for the down payment, you can avoid having to pay mortgage insurance costs.

Buying a Car

Car Buying Facts

  • The average price of buying a used car in 2014 was $16,800 (Edmunds.com)
  • The average transaction price for new, light vehicles in 2014 was $32,495 (Kelley Blue Book)

The Car Buying Process

While buying a house is usually the most expensive purchase most people ever make, buying a car is a close second. It’s also something most of do several times during our life. Regardless if you’re buying your first car or your fifth, there are bound to be up-front costs. And as with home buying, the more expensive the car, the higher the initial costs.

Down Payment for a Car

The larger the down payment you can afford, the more money you’ll save over the course of paying for the car. Settling for a less expensive car can mean paying for more repairs and consistent maintenance.

Leasing

One option is not to buy but to lease. When you lease a car, you make monthly payments for a contracted period of time (usually 12 months, 24 months or 36 months). As long as you keep the car’s mileage below a certain benchmark, you won’t owe any money when you turn the car back in at the end of the lease. You also could have an option to buy the car at a used-car price at that time.

Average Annual Miles per Driver by Age Group

AgeMaleFemaleTotal
16-198,2066,8737,624
20-3417,97612,00415,098
35-5418,85811,46415,291
55-6415,8597,78011,972
65+10,3044,7857,646
AVERAGE16,55010,14213,476
http://www.fhwa.dot.gov/ohim/onh00/bar8.htm

Starting a Business

Startup Facts

  • Every month around 543,000 businesses are started (U.S. Census bureau)
  • Startups raise an average of $78,406 to begin (Forbes)

Startup Costs

Gathering capital to get a business off the ground is difficult. The amount of money you need could be substantially higher than what it could cost you to buy a house. Plus, you should realize you should not spend all of your new annuity money on the actual purchase because expenses like equipment, marketing, hiring and overhead are ongoing.

Unexpected Expenses

Bottom line: Whatever money you think you need to open your business and build your product or service, plan on spending more. Startup costs usually involve enlisting the help of accountants and lawyers, paying for office space, buying or leasing computers and furniture and recruiting employees. At the same time, it’s tough to find investors when you do not have an established history.

Startup Checklist

  • Complete market research
  • Develop long-term plan
  • Create budget
  • Register business name and obtain licenses
  • Determine location
  • Choose entity type and EIN for taxes
  • Apply for government-backed loans
  • Get capital

Paying Off Bills

No one enjoys living with debt hanging over them. Regardless of where your debt comes from, owing hundreds or thousands of dollars brings stress and prevents the pursuit of happiness.

In some of these situations, a lump sum of cash can knock out a large portion of your debt and allow you to better handle the crisis you are facing.

Paying Off Medical Bills

Medical bills are one of the most unpredictable and unavoidable expenses that accompany adulthood. In fact, medical debt is the single biggest cause of U.S. personal bankruptcies.

This kind of debt can come with dental work, minor surgery, car accidents and major emergencies.

The good news about this kind of debt is that you might find a number of the people to whom you own money will take installments. Many doctors, dentists and hospitals have the ability to work out short- and long-term payment plans.

Another important tip is, regardless of the total amount of your bill to any single provider, as long as you make some monthly payment toward the debt – even only $10 a month – you can make it hard for that provider to turn you into collections. This can free you up to use your lump sum payout in other ways.

Medical Debt Facts

  • 1 in 5 American adults struggle to pay medical bills
  • Even with year round medical insurance coverage, 10 million Americans ages 19-64 will face bills they are unable to pay
  • ¼ of all medical-related bankruptcies in the United States occur in California, Illinois and Florida
(Centers for Disease Control, Nerdwallet)

Paying Off Credit Card Debt

Credit Debt Facts

  • In 2014, American household credit card debt increased by $57.1 billion (CardHub)
  • 1 in 3 people ages 30 to 49 have more credit card debt than emergency savings (Bankrate Survey)

Balancing Your Balance

Credit-card debt is about as commonplace as owning a smart phone. Across the country, people struggle to pay monthly bills and juggle one to three credit balances while trying (often unsuccessfully) to pay off even one of the cards. Missed payments charges and late fees pile up. Credit card issuers increase interest rates and make the debt hole even bigger.

Selling Payments to Pay Off Debt

Shedding credit-card balances is one of the biggest reasons why people sell their structured settlement payments. It’s difficult to get out of a cycle of credit-card debt without some form of instant money, be it from winning the lottery or from inheriting from a deceased loved one or cashing an annuity in.

Paying Off Student Loans

The price of higher education increases every year, forcing thousands of Americans to rely on student loans to some degree to afford school. Current estimates are that 40 million American carry some amount of student loan debt.

One thing to weigh is your monthly student loan payment(s) vs. other monthly bills that you have – and ones that you may have. Do you think you’ll need a car soon? Do you think you’ll need to relocate for new job?

If the answer is that you’re going to need more money again soon, you should think about holding back part of your payment rights so that you have access to them later.

Student Loan Facts

  • Total student debt is $1.2 trillion
  • The class of 2014 graduated with an average student loan debt of $33,000 (Edvisors)

Affording Your Divorce

There’s no getting around the fact that divorce hurts. Not only does it drain you emotionally – you get angry, you get sad, you get frustrated, you get relieved – but it also deals both sides a financial blow. It’s common that both sides feel like they got the short end of the financial stick, realizing they have to get by with less money every month.

There are added costs: legal fees, therapy and child counseling costs. And there’s the fact that bills that once were shared – cable bills, cell phone bills, water and electric bills fees – suddenly are solo costs.

The reality is that annuity holders sometimes have to sell all or part of their future payments because they’re a shared asset. Other times, one side has to sell just to avoid going broke during or after a divorce. In most cases, it beats bankruptcy.

Divorce Statistics in America for Marriage

MarriagePercent of Marriages that End in Divorce
First Marriage45% to 50%
Second Marriage60% to 67%
Third Marriage70% to 73%
www.divorcestatistics.org

Age at Marriage for Those Who Divorce in America

AgeWomenMen
Under 20 years old27.6%11.7%
20 to 24 years old36.6%38.8%
25 to 29 years old16.4%22.3%
30 to 34 years old8.5%11.6%
35 to 39 years old5.1%6.5%
www.divorcestatistics.org

Life with Partial Payments

An often overlooked part of the planning process for selling annuities includes taking a comprehensive look at how selling your payments impacts your life over the long haul. You want to develop a strategy that incorporates your money needs today and your long-term needs. You want to avoid a financial calamity, not delay it.

Because there are flexible selling options available, there are different ways a budget may be impacted by selling payments. For example, you could sell five years of payments expected a decade from now. In this case, you would only have to consider supplementing your income during the five years you will be without payments. One way to account for this loss is making sure you have reliable Social Security income during that time.

In another example, you could sell 50% of all your remaining payments. This means you would still receive regular payments, but the sums will be significantly reduced. In this case, you want a solution that consistently provides for the reduced payments. This could be accomplished by cutting your expenses or finding another source of future income.

Life with No Payments

When you sell your entire stream of payments, you should consider a new retirement income strategy. The fact is, by selling everything you may ensure that you will have to work well into your 60s to have the retirement you want.

Start with your employer and bank to see the benefits each offers. Increase your retirement security further by delaying Social Security payments and adjusting your budget. The sooner you begin trimming your expenses, the better prepared you will be for the golden years.

One advantage of getting a large sum today is the ability to invest this money for greater returns. If this is your intention for how you will use payments, then your investment yield can used for retirement.

Accessing the cash that was locked in your annuity or structured settlement solves an assortment of problems. Take responsibility to spend the money wisely. You will not need to wait for the next calendar day with a scheduled payment to finally come around. You will not be stuck putting off bills that have to be paid. You will have the resource to get back in control.

Life with No Structured Payments

Things to Do after Selling

After you get your money from selling your structured settlement or annuity, remember that you have some responsibilities because of the sale. There are also a handful of things you should do to protect your long-term finances. Completing these tasks helps ensure that your long-term needs are met and your resources are used to the best of each’s potential.

Assess your financial situation after selling by:

  • Contacting your financial advisor

    As the windfall of cash from your payments hits your bank account, take a minute to schedule an appointment with your financial advisor. The benefit is twofold: it accounts for future losses from selling payments and current gains in exchange for payments.

  • Reporting taxes after selling

    You need to account for the sale on your next year’s taxes. Every tax filer’s situation can look different. For sellers under the age of 59 ½, a 10-percent early withdrawal penalty on the income is incurred. You may be responsible for taxes on earnings and pre-tax annuity contributions. Sales of structured settlements generally do not incur tax penalties.

  • Updating your will and trust

    Whenever you encounter a drastic change in your financial situation, it’s time to evaluate your will and trust. Selling a significant portion of annuity payments is one such occasion. Evaluate which assets are still available for beneficiaries and spouses. There may be disparities that will demand using other resources to sufficiently provide for loved ones.

  • Rebalancing your investments

    Some people turn to annuities because they offer a guaranteed return, a stable income for the future. Once payments are sold, you divert from using time to leverage your principal. You should now re-think investment strategies. Can some of the cash from payments be placed toward an alternate investment? Higher yield investments, like investing in a business, can make the most of your annuity cash.

  • Putting away money for savings

    Once you transfer payments, you won’t be able to rely on the same monthly or yearly lump sums initially laid out in your annuity contract. Because this reduces your future income, you should ensure that you still provide for living expenses and retirement needs. Start small, like with automatic transfers of paychecks into savings, and slowly build up your nest egg.

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