Listen to an old-timer: don't be fooled by structured settlement payout "rates".
What is a "rate"? When you are offered to sell your structured settlement, buyers would cite a "discount rate" based on which your structured settlement will be valued.
As well, in the Disclosure documents that buyers are required by law to submit to you, the Discount Rates will be quoted.
But do these discount rates really matter?
In fact, they can be very confusing.
What really matters to you, though, is how much you will ultimately end up getting for your structured settlement sale.
To answer this question correctly, you should be able to differentiate between 3 distinct rates that may be mentioned in your written disclosure. These rates are...
Don't worry if you don't understand exactly the mechanics. What is relevant to you are essentially the second and third ones; the first one - the Federal Rate - is not as important for your purpose.
As a rule, the higher the effective rate, the LESS you'll get paid. The final price is what you are actually paid after taking off applicable fees and charges.
Below I'll explain briefly all the 3 mentioned discount rates used for calculating the value of your structured settlement payout.
The federal discount rate is the basis for the valuation of the structured settlement payout. It is what makes up the Present Value of your Future Payments.
However, this rate is not what you should concern yourself of. It will not be of much practical relevance to you in understanding the price that you'll get paid for your structured settlement sale.
It may as well be misleading to you. As explained, the lower the rate, the MORE you get. However, your settlement's value will be determined at a much higher rate, the Effective rate that I'll explain next.
So, don't be fooled by structured settlement buyers attempting to point you to the federal discount rate. It is not most relevant to you.
Let me give you an example:
Let's suppose that your future settlement payments over the next 10 years amount to a total of $100,000. At a discount rate of 0.07 (seven percent), you would receive something around $51,000 (after rounding off) in your structured settlement payout.
You would be very lucky to receive this payout for selling your structured settlement payments of 10 years. In reality, you likely to receive much less than that.
This is the rate that if of much more relevance to you and you should pay careful attention to the effective rate stated in your disclosure.
What is the effective rate? Simple. It is the rate that is In Effect applied to your structured settlement payout. In other words: it is the more accurate rate at which your settlement will be valued.
It is simply the rate that determines how much money you will in fact get paid for your structured settlement sale.
Let's say, your disclosure documents reveal that your settlement will be valued at a 15% effective discount rate, to use the above mention illustration, for payments in the future value of $100,000 spread over the next 10 years, you'll receive around $25,000.
Right, that's about HALF of what it would be valued at a federal rate of 0.07.
This illustrates how critical it is to notice the different rates that are mentioned by the structured settlement buyer and differentiate between a federal and effective rate, both of which are required by law to be disclosed to you by the buyer.
What is a typical Effective Discounting Rate?
There are no hard and fast rules of what precise rate a company is allowed to apply to your settlement. In fact, rates around 20% or higher are not uncommon. In some cases, much higher rates, even more than 60%, have been reported. Of course, it is scandalous and exaggerated rates can'e be considered fair and reasonable. Structured settlement transfers at significantly high rates are most likely to be turned down by the judge at the mandatory court hearing to approve the transaction.
The effective rate is also referred to as the Assignment Price of the structured settlement buyout.
The effective rate is not yet the end of the story. There's one more important determinant you should pay close attention to, and these are the attorney fees that may be billed on you account.
For example, a structured settlement buyer may offer to buy your payments at a 14% effective rate. In the above example, this will amount to close to $27,000. However, fees for attorneys that are hired to work out the legal aspects of the settlement in the amount of $2,000 may as well be taken off your final payout. Thus, you'll end up with a final pay of about $25,000.
To wrap it up...
To be able to understand the final structured settlement payout you'll get, you should notice the 3 different rates that may be mentioned in your disclosure: