Is This Lump-Sum Offer for Future Benefits Ethical?
Most structured-settlement sales involve the transfer of only a portion of future payments.
Q. For 10 years my aunt has received monthly checks from a structured settlement after she was partially disabled in a car accident. The payments are a major part of her income, and she has few other assets besides her home.
Now she has been approached by a smooth-talking salesman offering a lump sum to buy the remaining 20 years of payments. She is tempted by the deal, thinking she can use some of the money to make repairs to her home and help a young relative with tuition, while gradually drawing down the rest to live on. Problem is, she’s not sophisticated about money, and as best I can tell, she’s being offered less than 20% of what I calculate to be the present value of the total she would get over the next 20 years. Is this ethical? How can I protect her from a bad decision?
A. There is nothing unethical about offering to buy your aunt’s future income stream for a fair lump sum, but this deal sounds suspect. I’m concerned that the salesman is trying to buy all her future payments, with a risk that she will go through the funds too soon. Most structured-settlement sales involve the transfer of only a portion of future payments. Worse, a lump-sum offer of less than 20% of the present value is a bad deal. Discounting the value of two decades of future payments would set the present value at about 40% to 50% of the total of those payments. Various factors rightly reduce a fair offer below that level, but nowhere close to the stingy offer your aunt is considering.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Tell your aunt that she can sell just a portion of her future payments, giving her some liquidity now but leaving most of her guaranteed income intact. Insist that she consult an impartial attorney (recommended by someone other than the purchaser) and get a financial planner’s opinion. Solicit competitive bids from two or three reputable buyers to negotiate a fair offer that delivers a higher portion of the present value. Most states require a judge to certify that agreements like this are in the best interest of the seller, but some judges approve appallingly bad contracts. Your aunt deserves better.
Have a money-and-ethics question you’d like answered in this column? Write to editor in chief Knight Kiplinger at ethics@kiplinger.com.
To continue reading this article
please register for free
This is different from signing in to your print subscription
Why am I seeing this? Find out more here
Knight came to Kiplinger in 1983, after 13 years in daily newspaper journalism, the last six as Washington bureau chief of the Ottaway Newspapers division of Dow Jones. A frequent speaker before business audiences, he has appeared on NPR, CNN, Fox and CNBC, among other networks. Knight contributes to the weekly Kiplinger Letter.
-
Stock Market Today: Nasdaq Soars Ahead of Tesla Earnings
The EV stock rose nearly 2% ahead of its highly anticipated Q1 earnings report, due after tonight's close.
By Karee Venema Published
-
GM Stock Accelerates After Earnings Beat
General Motors beat expectations for the first quarter and raised its outlook for the year. Here's what you need to know.
By Joey Solitro Published
-
7 Things Medicare Doesn’t Cover
Healthy Living on a Budget Medicare Part A and Part B leave some pretty significant gaps in your health-care coverage. But Medicare Advantage has problems, too.
By Donna LeValley Last updated
-
Rent or Buy? Which Is Best in Retirement?
Making Your Money Last Renting isn't right for all retirees, but it does offer flexibility and it frees up cash.
By Sandra Block Last updated
-
10 Things You Need to Know About Retiring to Florida
Making Your Money Last If Florida is part of your retirement plan, we offer up a few tips to help you find your way.
By Bob Niedt Last updated
-
6 RMD Changes We Could See This Year
Making Your Money Last Congress is considering two bills that would make major changes to required minimum distributions. Could your RMDs be affected?
By Rocky Mengle Last updated
-
A Kiplinger-ATHENE Poll: Retirees Are Worried About Money
Making Your Money Last Concerns about recession, inflation and health care costs weigh on retirees and near retirees.
By the editors of Kiplinger's Personal Finance Published
-
The Retiree's Guide to Going Back to Work
Making Your Money Last Inflation and a bear market have prompted some retirees to change course.
By Lisa Gerstner Published
-
Does an Annuity Belong in a 401(k)?
Making Your Money Last Unlike pensions, 401(k)s place the risk of outliving savings squarely on the retiree's shoulders. Find out what's right for you.
By David Rodeck Published
-
Social Security: 8 Must-Know Facts About Your Benefits
Making Your Money Last What you don't understand about Social Security could cost you. Here are key facts worth knowing.
By David Rodeck Published