You Want Cash Now?

You have probably seen the advertisements for the lump sum settlement companies that pay you a lump sum today in exchange for your annuity payments. Suppose you just won the lottery and will get $50,000 per year for the next five years. You would prefer a lump sum today. We promise the rate you should get for selling your annuity is 8 percent. However, if you sign today, we will give you a 10 percent rate. Will you sign today so you can lock in the 10 percent interest rate? Hopefully you should know that increasing the interest rate decreases the present value. Unfortunately, it seems that many people don't understand this concept. A recent article highlights several examples of individuals who sold their pension checks for a lump sum payment with interest rates ranging from 27 percent to 106 percent. The companies involved in this practice avoid usury laws by arguing that the lump sum is not a loan but rather an advance.