Structured settlements have become a normal part of workers’ and personal injury claims in the United States, according to the National Structured Settlements Trade Association (NSSTA). In 2001, NSSTA Life Insurance members wrote more than $ 6.05 billion in annual premiums issued as a settlement of bodily injury claims. This represents an increase of 19 percent over the year 2000.
A structured settlement is a dispersal of funds for a legal claim where all or part of the arrangement calls for future periodic payments. Funds are paid in regular installments – annually, semi-annually, or quarterly – either for a specified period or for the life of the plaintiff. Depending on the needs of the individual concerned, the structure may also include some immediate payments to cover special damages. Payment is usually made by purchasing an annual stipend from a life insurance company.
A structured settlement structure can provide long-term financial security for injury victims and their families through a stream of tax-free payments tailored to their needs. Historically, it was used for the first time in Canada and the United States during the 1970s as a substitute for lump sum payments to affected parties. Structured settlement can also be used in situations involving lottery winnings and other large funds.
How the structured settlement works
When a plaintiff settles a case with a large sum of money, the defendant, the plaintiff’s attorney, or the financial planner may suggest paying the settlement in installments over time rather than paying a single lump sum.
The structured settlement is actually a swap. Affected individuals and / or their parents or guardians work with their attorneys and an outside mediator to determine future medical and living needs. This includes all upcoming operations, treatment, medical devices, and other healthcare needs. Then, an annual stipend is purchased and kept by an independent third party who makes payments to the injured person. Unlike dividends or bank interest, these structured settlement payments are completely tax-deductible. Moreover, the pension grows for the individual tax free.
Pros and Cons
As with anything, there is a positive and a negative side to building settlements. One important feature is tax evasion. When preparing an appropriately structured settlement, you may significantly reduce the claimant’s tax liabilities (settlement outcome). Another benefit is that a structured settlement can help ensure that the plaintiff has the funds to pay for sponsorship costs or future needs. In other words, a structured settlement can help protect the plaintiff from himself.
Let’s face it: Some people find it difficult to manage money, or say no to friends and family who want to “share the wealth”. Receiving money in installments can extend its life.
The downside to building settlements is the compact structure (no pun intended). Some people may feel constrained by the periodic payments. For example, they may want to purchase a new home or other expensive item, but they lack the funds for that. They cannot borrow against future payments under their settlement, so they are stuck until the next payment arrives.
From an investment perspective, the structured settlement may not make the most sense for everyone. Many standard investments can provide a greater long-term return than the annuities used in structured settlements. So it may be better for some people to accept a settlement for a lump sum and then invest it for themselves.
Here are some other important points to keep in mind about structured settlements: An injured person with long-term special needs may benefit from receiving periodic lump sum payments for the purchase of medical equipment. Minors may benefit from a structured settlement that provides certain costs when they are young – such as educational expenses – rather than in adulthood.
Affected parties should be wary of potential exploitation or risks related to structural settlements. They should think carefully:
High commissions – annuities can be very profitable for insurance companies, and they often carry very large commissions. It is important to ensure that commissions charged with setting up an orderly settlement do not eat up too much of its asset.
Inflated value – Sometimes the defense overvalues an organized, negotiated settlement. As a result, the plaintiff ends up with less than what was agreed upon. Plaintiffs should compare fees and commissions levied on similar settlement packages by a variety of insurance companies to ensure they get the full value.
Conflicts of interest – There have been situations where the plaintiff’s attorney referred a client to a specific financial planner to prepare an orderly settlement, without revealing that he would receive a referral fee. In other cases, the plaintiff’s attorney prepared an orderly settlement on behalf of the client without disclosing the pensions being purchased from his insurance company. Plaintiffs should know the financial interest their attorneys may have in relation to any financial services provided or recommended.
– Hire multiple insurance companies – It is advisable to buy the annual premiums for an orderly settlement from several different companies. This provides protection in the event that a company that issued an annual pension settlement package goes into bankruptcy and defaults.
Benefits of selling a settlement
The structured settlement is specifically designed to meet the needs of the claimant at the time it is created. But what happens if the installment arrangement is no longer valid for an individual? If you need cash for a large purchase or other expense, consider a structured settlement sale. Many companies can purchase all or part of the remaining periodic settlement payments for one lump sum. This can boost your cash flow by making money that you can immediately use to buy a house, pay college tuition, invest in a company, or pay off debt.
If you are considering cashing your structured settlement, contact your attorney first. Depending on the state in which you live, you may have to go to court to get approval of the acquisition. About two-thirds of the states have laws that limit the sale of structured settlements, according to NSSTA. Tax-free structured settlements are also subject to federal restrictions on their sale to a third party, and some insurers will not assign or transfer pensions to third parties.
When selling your structure settlement, check with several companies to make sure you are getting the highest return. Also, ensure that the company buying your settlement is reputable and well established. And remember, if the deal sounds too good to be true, it probably is.