Structured settlement can provide great security by guaranteeing a monthly income. Whether you get $500 or $5000 a month it is a great relief that this money will be coming in month after month, especially if the payments are guaranteed for the rest of your life- as opposed to fixed period. Whether or not your money from a structured settlement will serve you as well today as it will tomorrow depend on a few factors.
One of the most critical factors in determining whether will provide you with the same level of “buying power” today as it will in a decade or longer, is whether the structured settlement contains a cost of living increase (or “COLI”). A COLI is, generally speaking, an annual adjustment that causes your monthly payment amount to increase. COLI’s can range from 1 percent annually to 3 percent or more. Depending on the amount of the COLI, and the inflation rate during any period of time, or over a finite period of time, the buying power of a person receiving a structured settlement may not be impacted.
What if your structured settlement does not have a COLI? What is the impact of this and how does it affect the so-called buying power? Let’s take a simple example, lets say you get $1,000 per month from your structured settlement and your rent, this year is $1,000.00 and it increasing by 3% every year. The first year of the lease, the current year, and your structured settlement monthly income will cover the rent exactly and you will not have an issue. That said, next year your structured settlement will still be $1,000.00 and your rent, based on the 3% increase your landlord charges, will be $1,030.00.
Not a big deal, you can cover the extra $30.00 each month. But say you stay at the same apartment for the next 10 years. In ten years your structured settlement will still be paying $1000 per month but your monthly rent will be over $1300.00 per month. You will have a $300.00 (or 30%) shortfall in your monthly expense.
For this reason, some people consider selling a structured settlement in order to get immediate lump sum so they can put their money to work. While in many cases selling a structured settlement is not the answer, in some situations you can sell a structured settlement for a lump sum and earn more money than having it locked away the structured annuity. Every situation is different and you should consider all options, including the loss of the security the structured settlement provides if you were to sell.