What Is A Structured Settlement?

Structured Settlement

Structured settlements can include a lump sum payment Normally, injured victims choose between a structured and a lump sum settlement (where they receive all of their money at once). However, it's important to understand that structured settlements still allow a lump sum payment on the front-end.
A structured settlement is an alternate method of dispensing compensation to an injured claimant during settlement. If you choose to receive your settlement in the form of a structured settlement, you will not receive all of your compensation in the form of one lump sum payment but rather you will receive payments from your settlement in incremental amounts in fixed intervals over time.

More specifically, the structured settlement money paid by the insurance company is placed into an investment where it will grow with interest over time. The additional money earned from the interest eventually becomes part of the available funds available for settlement payments to the claimant. Therefore, the amount of money the claimant receives over time in a structured settlement is more than if one had received the same final settlement amount in the form of a lump sum.

Structured Settlements and Taxes

A good starting point for understanding structured settlements and taxes begins with an understanding of the Periodic Payment Settlement Act of 1982.

Generally speaking, the view by Congress is that structured settlements are a good idea as they help to promote long-standing financial stability for the injured victims and their families. With the Periodic Payment Settlement Act of 1982, Congress implemented a list of tax regulations that encourage the use of structured settlements as an option. As a primary incentive, Congress classifies payments from structured settlements as exempt income or tax-free.


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Structured Settlement Payment Options

In a structured settlement agreement, you get to do the structuring. You have the freedom to design the payment plans of a structured settlement to suit virtually any personal preference you have.
For example, some may prefer to receive regular monthly payments over time with no other payment plans included whatsoever. However, others may want a large initial payment at first, and then regular monthly payments.
Some people get quite creative. For instance, some choose to put aside a designated lump sum for their daughter or son’s prom, graduation, or wedding. Others receive regular monthly payments but also schedule a single large payout to occur annually every Christmas. Where the settlement figure is large enough to substantiate the request, almost anything is up for consideration.

Advantages of Considering a Structured Settlement

When an injury claim is negotiated toward a final settlement, both sides will discuss and debate the monetary value of the claim in question. Unfortunately, even the best efforts to settle a claim can end with severe disagreements over the value of the case. If there is no agreement, then the case will probably have to go before a jury for them to decide.

A trial is not an ideal option. Any experienced lawyers will tell you that there is never a guarantee of what a jury is going to conclude. Contrary to expectation, a jury may surprise everyone and conclude that nothing is owed. When it comes to a jury, you just never know for sure; therefore, it’s always better to exhaust all possible settlement options before taking the matter to an unpredictable jury.

Structured settlements are guaranteed

The company responsible for issuing the annuity guarantees the payments. In the unlikely event that the company becomes bankrupt, the annuity is normally backed-up by either the state by way of a guarantee association or an association similar to the Federal Deposit Insurance Corporation (FDIC). This being the case, you have at least 2 levels of confidence that payments to you from your structured settlement will not be disrupted or altogether lost.
On the other hand, if you decide to invest your settlement money on your own, the return on your investment might not do so well. It is not guaranteed at all. In fact, it may go south quickly, resulting in you losing all your money before you know it. Given the guarantee supplied in a structured settlement, we think the saying “a bird in the hand is worth more than 2 in the bush” should be considered.


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Disadvantages of Structured Settlements

Structured settlements don’t allow you to have full control of your money. Your money is given to someone else to invest. You don’t get to choose where the money is invested or where it goes. However, if you receive all of your settlement money in the form of a lump sum payment, you are in the driver seat. Having access to all of your money at one time allows you the freedom to make your own investments how you see fit.

Additionally, if your settlement money is structured, you are not totally free to make large purchases when you want. In structured settlements, large sums of money are simply not available upon request.

Finally, some people just want their money and don’t feel like giving an explanation to everyone else. Like religion and politics, how someone spends their own money is often seen as a private matter and personal choice. If you want 100% control over all your money now, a structured settlement is not for you.

  • Little flexibility once the settlement terms are established.
  • Hard to use monthly payments as an emergency fund compared to a lump sum payment
  • Low interest earned compared to other investment vehicles.
  • You can negotiate a settlement buyout but will receive less than you would under the structured settlement based on the purchasing company’s discount rate.

Structured Settlement Payout Options

A structured settlement annuity is typically offered when a person is awarded a large amount of money. Smaller settlement awards are typically paid out in one payment.

Benefits of Structured Settlements

  • A structured settlement can provide greater financial stability, especially in cases involving long-term injury or disability.
  • The structured settlement payments are tax-free.
  • Structured settlement annuity accounts gain interest.
  • The settlement helps to replace any lost income experienced by the plaintiff.
  • The payments can pass to a survivor after the death of the beneficiary.
  • The payment does not fluctuate with market conditions.
  • Lowered risk of making bad financial choices when compared to receiving a large lump sum.

How are Structured Settlements Taxed?

Due to the Periodic Payment Settlement Act of 1982, nearly all structured settlements resulting from personal injury lawsuits are free from US federal income tax. Structured settlements are not taxed because the federal government views such payments as restorative, righting a wrong done to you, not income.

What Happens If A Beneficiary Takes Over?

Including a death benefit provision in a structured settlement allows any guaranteed payments to pass to a beneficiary upon the settlement owner’s death. The transfer will not usually trigger taxation, though very large estates may have an estate tax due. Payments received from the structured settlement remain non-taxable for the beneficiary.

Cases That Result in a Structured Settlement

Common types of court cases that could result in a structured settlement for the plaintiff include:

1. Personal Injury A personal injury lawsuit is a civil case in which a plaintiff has been harmed and is seeking money from the defendant, whom they believe to be responsible for their injury. Oftentimes, plaintiffs in personal injury lawsuits are awarded a structured settlement to cover medical expenses or other ongoing costs.

2. Medical Malpractice A medical malpractice structured settlement is compensation given to an individual harmed due to a doctor’s negligence. The structured settlement pays the injured party for a certain period. The settlement provides the individual with a reliable source of income that can help pay related medical bills and other financial needs.

3. Wrongful Death A wrongful death claim may be filed when the victim’s death was caused by the direct actions or negligence of another party. Wrongful death cases often end with a settlement agreement or a compensation award. When a large sum of money is awarded, the amount is usually paid out as a structured settlement.

When a wrongful death occurs, the surviving family members, such as the spouse and children, often experience financial difficulty due to lost income. Choosing a structured settlement means ongoing payments that can help maintain the standard of living the family is accustomed to. Any guaranteed settlement payments can pass to an heir, should the plaintiff pass away before the guaranteed minimum number of payments is made.

4. Worker’s Comp Worker’s compensation laws protect injured workers. These laws require employers to carry insurance to cover claims in case a worker becomes injured on the job. When an injured employee is awarded a worker’s compensation settlement, they may receive a lump sum payment or be offered a structured settlement.

A worker’s compensation structured settlement is meant to partially replace the worker’s lost wages, whether due to a temporary injury or permanent disability.


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Selling A Structured Settlement

While a structured settlement may work well initially, it does not account for changes to your financial situation. Monthly payments over several years might not suffice to immediately pay off debt, buy a house or car, or cover a major medical event.
It is possible to sell your entire structured settlement for a lump sum. Alternatively, you can sell some of your payments to cover a short-term need, then continue to receive payments in the future.
Obtain offers from multiple structured settlement buyers to get the best deal. Purchasing companies base their charges on a discount rate, which can vary among offers. Usually between 9% and 20%, the discount rate is primarily based on the purchasing company’s expectation of future interest rates. The discount rate then applies to your future payments to determine the amount you receive.

Periodic Payment Settlement Act

Multiple laws protect the rights and interests of structured settlement recipients. The Periodic Payment Settlement Act of 1982 allows individuals to receive their structured payments tax-free. However, alternating structured payments voids their tax-free status.
Additional Laws Were Put Into Place
In the 1990s, many advertisements offered structured settlement recipients the option of receiving a lump sum instead of monthly payments. Much of this advertising was misleading or highly aggressive.

The Federal Structured Settlement Protection Act

Despite its name, the Federal Structured Settlement Protection Act is an industry agreement and not federal law. Major industry associations voluntarily agreed to self-regulate to protect structured settlement owners.
Individuals need to ensure any proposed transaction complies with their state’s laws and regulations. State laws can help protect you and ensure the transaction isn’t blatantly unfair.
State Laws Protect Structured Settlement Recipients

A structured settlement can provide long-term financial security. State laws help protect structured settlement holders from misleading or predatory settlement buyers. With knowledge of these laws, structured settlement recipients can safeguard their money when selling a structured settlement.

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