If you have been solicited to sell structured settlement payments on the basis of the slick "sales pitch" that claims non specific "better investment opportunities" as a reason for you to accept the discounted lump sum they want to pay you… BEWARE!
First, many of the folks promoting this theory may not be properly qualified or licensed to recommend insurance or investnents so you should always check this first. Second, understand that without a clear understanding of risk your chances for disappointment increase.
Monte Carlo Analysis, or Monte Carlo Simulation could be applied in this situation and may be very useful. The same concepts of risk education apply as they would at the time the structure was created. With Monte Carlo Simulation the many variables of your current stated needs can be projected and weighed with a statistical sample of hypothetical returns on the proposed discounted "cash now" lump sum, in an easy to view computerized statistical trial. Thus you can have a better understanding of the chances of success or failure. You can then in a better position to make an informed decision as to whether the risk is worth the price you would need to pay (the discount) to cash out.
Making inducements, with the intent to cause someone to sell their structured settlement payments rights, based on a static investment projection is inherently flawed because of failure to account for implicit volatility during the investment period and its potential impact on your income needs. What are the chances that the discounted lump sum could be depleted? Do you know? Does your client know? Does the person inducing you to part with your asset know? Wouldn’t you like to know?
For more information on Monte Carlo Analysis and Simulation click here.
Be sure to read the John Kenneth Galbraith quote, and read it twice!
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