How to Cash in an Annuity from a Structured Settlement

Many times when a large debt will be repaid, especially a debt that is supposed to be used for periodic expenses, the contract for payment will allow for payment over a long period of time.  Periodic payments over time are called annuities, and although the name implies that the payments are made yearly, they can be made in any interval.

However, recipients of annuities from these types of agreements might have a need for a larger up-front payment and be unable or unwilling to wait for the annuity to pay out over its life.  For people in such a situation, there is no shortage of companies that will allow you to sign over the annuity in exchange for a lump sum payment up front.  There are some guidelines that you should consider if cashing in your annuity is tempting.

It should be no surprise that the companies offering to buy your settlement payments are not acting out of the goodness of their hearts.  They are entering into a business deal with you for the purpose of making a profit.  In essence, they will buy your annuity for less than it is worth, in exchange for giving you the cash up front to let you walk away.  The difference between the two amounts is a profit for the company that buys the annuity from you.

It is not just a matter of simple arithmetic to come to the value of the annuity.  Money that is promised in the future is worth less than money in the hand now.  For example, assume that you are scheduled to receive a payment of $1,000 in one year.  If I have the option of holding $1,000 now and waiting for a year, or receiving $1,000 in one year, the $1,000 now is a better deal.  If I receive the money up front, I can invest it or put it to use.  By next year, it might be worth $1,100.  Therefore, the promise to receive $1,000 in a year is more like an offer to receive $900 today.  The lower amount, $900, is called the discounted present value of the $1,000.  Applying that same logic to a promised series of payments over many years to come, and a company offering to buy your structured settlement annuity will offer a discounted present value to cover the entire amount of the payments coming due.

Coming to a calculation about the discounted present value of an annuity requires making some assumptions, and you can be certain that any firm offering to buy your annuity will make those assumptions in their own favor.  Don’t be afraid to verify their calculations.  If the value of the structured settlement is large, a transactional attorney will likely be able to review the proposed terms of the deal and verify whether better deals are available.  The attorney can also negotiate a deal for you.

Finally, ensure that your settlement contract allows you to assign the benefits to a third party.  In most cases you can.  But in some cases, especially where the annuity is meant to provide for the wellbeing of another person, the agreement might have a restriction to prevent cashing it out up front.

For people who need cash now and are willing to pay a price, converting a structured settlement annuity into a cash payment might make sense.   But before you sign away your annuity rights, have an independent party take a hard look at the agreement to be sure that you are getting the best deal that you can.