Jan won the Lottery! She won a million dollars. She's rich, right? Well, maybe.
Jan's situation is similar to many other settlement situations including sports contracts, insurance settlements, bonuses and court awards. Large winnings like lotteries and sweepstakes as well as the other structured settlements usually pay off using an instrument called an annuity. An annuity is a series of payments, usually managed by an insurance company. Most retimerment plans pay off using an annuity as well.
Jan is going to receive $50,000 a year for twenty years. Not a bad income but not the lap of luxury, either. Jan is keeping her job. However, she would like to be able to use larger chunks of her winnings to accomplish some goals instead of receiving a steady income. She'd like to buy a house and a car. Later on she might start a business. Her children are young and she expects them to go to college.
Through her certified cash flow consultant, Jan learns that she can sell part or all of her future payments to a cash flow funding source and receive lump sums today. The key consideration is whether her payments are assignable or not. Not all structured payments are assignable.
Assignable simply means that you have the right to sell your payments. Massachusetts State Lottery winnings are not assignable, for example, but most such contracts are. Jan's case is not typical (most people do not win the lottery!). The more likely example would include such contracts as insurance settlements, court awards, sports contracts, disaster relief awards, medical viaticals and almost any other contract in which a large sum of money is going to be paid out in regular payments over a long period of time.
All of these contracts are candidates for conversion to cash depending on two things.
- They are assignable so that you have the right to sell them.
- The party making the payments is financially reliable. In almost all cases, annuity contracts are paid by insurance companies and are completely reliable.
Returning to Jan, what are her options?
The process is simplicity itself. Through her certified cash flow consultant, Jan provides the basic financial facts of her winnings; when did she win, how much, how many payments? The reliability of the payor is already know and well-established. Most lotteries buy annuity contracts from insurance companies to pay off winners, and it's the insurance companies who provide the twenty-year income.
Jan has complete control over her choices.
She can sell the entire contract and receive a large lump sum representing the present value of that million dollars. If she reinvests the money herself, she could earn significantly more money than the total she would have received in payments. Even the most conservative guaranteed treasury securities pay better than most annuity contracts (see your financial advisor).
She can sell a portion to meet a specific goal and leave the remainder as future income or a reserve account she can tap for other projects in the future. For example, she can sell five years worth of payments, and leave the remaining fifteen years in place. Five years later she starts receiving her $50,000 a year again. Having set up a relationship with a funding source to sell a portion of her future payments, she can repeatedly sell additional portions in the future as needed.
If you know you are going to be receiving structured payments for any kind of situation, work with your certified cash flow consultant and your other financial advisors before the contract is settled so that you can make the most informed choice you can to fit your needs. With advance planning you can even calculate whether it is more profitable to take a lump sum to begin with intead of a series of payments, or accept a series of payments, then sell them through your certified cash flow consultant to a funding source.
