What Is a Structured Settlement?
Despite all the legal
language around them, structured settlements are simple. Many lawsuits result
in someone or some company paying money to another to right a wrong. Those
responsible for the wrong may agree to the settlement on their own, or they may
be forced to pay the money when they lose the case in court.
If the settlement is
small enough, the wronged party may have the option to receive a lump sum
settlement. For larger settlements, however, a structured settlement annuity
may be arranged.
In this case, the
at-fault party puts the money toward an annuity, which is a financial product
that guarantees regular payments over time from an insurance company.
The structured
settlement agreement details the series of payments the person who was wronged will
receive as compensation for the harm done to them. Structuring the money over a
longer period of time offers a better future guarantee of financial security
because a single payout can be spent quickly.
Structured settlements
gained popularity in the 1980s after the U.S. Congress passed the Periodic
Payment Settlement Act. According to the National Structured Settlements Trade
Association, almost $6 billion in new structured settlements are issued
annually.
Frequently Asked
Questions: Get straightforward answers to common questions about a structured
settlement annuity.
How Do Structured Settlements Work?
A structured settlement
pays out money owed from a legal settlement through periodic payments in the
form of a financial product known as an annuity. However, many legal
settlements offer a lump sum payment option, which provides a one-time sum of
money. The key differences between both annuity settlement options are the
long-term security and the taxes. For example, money received from a personal injury
case is almost always tax free when you receive it. However, once the money is
yours, you’re liable for taxes and dividends from the lump sum.
There are a number of
reasons why an individual may receive a structured settlement, the most common
cases being:
Personal Injury: A
personal injury case is a civil case where someone who’s been harmed files a
lawsuit seeking money from the person believed responsible for the harm. Money
in the form of a structured settlement helps recipient pay for medical expenses
or other costs.
Workers’ Compensation:
Most people know about workers compensation, which pays out workers who get
injured on the job while they recover. Payments can be used for medical
treatment and wage replacement during periods when injured employees are unable
to work and other expenses.
Medical Malpractice: In
some unfortunate cases, doctors can do more harm than good. In this instance,
injured patients or the families of deceased patients can sue for medical
malpractice.
Wrongful Death: A structured
settlement is also a common way to compensate the family of someone whose death
was the subject of a wrongful death claim. Families may be entitled to receive
a stream of tax free payments, to replace the loss of income previously earned
by the lost loved one.
Structured settlements
— or structured annuities — are both financial products and legal judgements.
While they function somewhat like private assets, they are also subject to
complex regulations. Learn about the process of being awarded a structured
settlement annuity as well as the legal protections and advantages given to
structured settlement recipients through the following pages:
Structured Settlement
Payout Options: Compare and contrast the different ways to accept a cash
settlement from a lawsuit.
Government Support for
Structured Settlements: Learn about how the government uses the tax code to
promote the use of structured settlements.
Structured Settlements
for Minors: Read about why this type of settlement is typically used in cases
involving underage children.
Structured Settlement Pros and Cons
Structured annuities
are ideally suited for many different types of cases. However, once the terms
are in place, they cannot be changed. For additional information on how
structured settlements work, payout options, or how to access your cash award
ahead of the annuity contract schedule, the Structured Settlements FAQs page
can be a beneficial resource within your search.
There are a number of
advantages from receiving structured settlement payments. When deciding on any
financial investment, it is important to understand the benefits along with the
risks.
Pros
Structured settlement
payments are tax-free.
In the event of the
recipient’s premature death, the contract’s designated heir can continue to
receive any future guaranteed tax-free payments.
Payments can be
scheduled for almost any length of time and can begin immediately or be
deferred for as many years as requested. They can include future lump-sum
payouts or benefit increases.
Spreading out payments
over time can reduce the temptation to make large, extravagant purchases and
guarantees future income. This is especially helpful if the recipient has a
medical condition that will require long term care.
Unlike stocks, bonds
and mutual funds, structured settlements are not dependent on fluctuations of financial
markets. Payments are guaranteed by the insurance company that issued the
annuity.
A structured settlement
often yields, in total, more than a lump-sum payout would because of the
interest your annuity may earn over time.
Cons
Once terms are finalized,
there’s little you can do to alter them if they do not meet your needs. You
cannot renegotiate the terms if your financial situation or the overall economy
changes.
Funds are not
immediately accessible in case of an emergency, and the recipient cannot invest
the lump-sum payout in other investments that carry higher rates of return.
Tapping into your
structured settlement without selling payments will cost you money. You will
pay surrender charges and IRS penalties if you withdraw funds before age 59½.
Some parts of a
settlement, such as attorney’s fees and punitive damages can be taxed.
Not all states require
insurance companies to disclose their costs to establish a structured
settlement or lump-sum annuity. Without this information, a recipient could
lose a significant amount of money from their settlement through administrative
fees.
Selling Your Structured
Settlement Payments
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