In difficult economic times, I suspect that the number of people using various services that allow one to ‘get cash now’ for such things as annuities, life insurance, and legal settlements, will increase tremendously. In that light, I would stress EXTREME caution before signing over a guaranteed lifetime payment for cash now – especially if you are not so good with money!
Let’s cover a sampling of ways that one can get cash now, the decision-making behind that, and how these companies make money.
Get Cash Now!
You’ve seen the commercials typically running late night or during daytime soap hours. A well-dressed gentleman tells you that you can trade your annuity payments for lump sum cash “now.” Or an offer for a viatical settlement, meaning giving you cash for a life insurance policy that you may hold may be floated in front of you. Another interesting spin is the advance on an expected legal settlement (read more HERE)where you get cash now if it is likely you will win a legal settlement.
Why
Obviously (at least to me), they are targeting a certain demographic with these offers. By advertising late night, during soap hours, or on typical infomercial channels, they are targeting the unemployed and/or the elderly. I’m sure they are targeting low-income (pc for poor) folks generally, but are targeting these specific groups by their advertising strategy.
If money is tight, certainly trading an $800/mo annuity payment for $40,000 in cash or such would be VERY tempting to someone facing big one-time bills or a budget squeeze. For seniors on a fixed budget, this would be very attractive. Certainly, if a senior had a life insurance policy that was going to her HEIRS AFTER death, then the temptation there would be enormous to take money now. And with an economic slump, even more so.
How They Make Money – and How Much
I don’t have internal finance figures from these firms so I could not tell you their exact profit margins, but I can tell you how they make money and make some assumptions. For example, we can use PRESENT VALUE (PV) calculations to determine the financial value of an annuity payment. Effectively, we have to ASSUME an interest rate or USE a current rate, and turn monthly payments into a LUMP SUM – similar to winning the state lottery. And basically, using that assumed rate, we find the equivalent value between a lump sum and a monthly figure. It answers the question “would you rather have $1,000/mo for life or $80,000 right now?”
Not factoring in your emotions, PV calculations can help you decide mathematically what is a better choice. Let’s look at an example – and I will use a financial calculator with these buttons built in to solve (you can also do this on Microsoft Excel type spreadsheets).
let’s take an example – you are currently 70 years old. You receive a lifetime annuity payment of $800/month. Your life expectancy is, let’s assume on a standard table, 87. The settlement company is offering you $40,000. is this good for you? For them?
By running a Present Value (PV) calculation, assuming 5% interest, the present value of $800/mo for life expectancy (age 70 to 87) is $109,791.29. So I hope you REALLY need that $40,000 because based on this, you are losing BIG TIME.
Now you might counter by saying “I could die tomorrow and they lose.” And that would be true – but averaged over 100,000 customers, the average comes out and these guys make money. is this a good decision either way? I could not say I am not in your shoes but just know that these firms prey on desperation and if you find yourself in this situation, get some advice. Many professionals (including myself) would offer a no cost meeting to help someone in this situation. And I know many CPA’s, planners, lawyers, etc who would help someone for no cost as part of community service.
Don’t rush a decision!
Chris Grande
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