What is a Structured Settlement?
A structured settlement is a stream of future payments (either periodic or lump sum) that are paid by an insurance company in order to compensate you for a personal injury, wrongful death claim, medical malpractice, or other liability. These payments are generally tax exempt and they are designed to compensate you for pain and suffering, lost wages, or other similar losses.
For a long time, when people won damages in personal injury lawsuits, they received a large lump sum. Many recipients struggled to successfully manage their lump sum in order to be able to continually pay for expenses. Thus the structured settlement annuity was established back in the mid 1980s to encourage the settlement of a lawsuit out of court, set up a future payment stream that would fund medical expenses, lost wages and other financial planning needs all the while being tax exempt to the injured party. This industry has developed over the years so that in 2013, alone, more than $5.3 billion was invested in structured settlements in the U.S.
Where Do People Get Structured Settlements?There are a number of ways to end up with legal settlements such as through wrongful death cases, personal injury cases or workers’ compensation. Below are some of the reasons that are the most common.
- Personal Injury
A plaintiff wins a large award and the amount is put into structured payments over time, which is designed to help the recipient pay for medical expenses.
- Wrongful Death
When someone is compensated for the wrongful death of a family member, it often results in a structured settlement.
- Workers Compensation
When someone is injured on the job, they may receive a structured settlement to help them pay for the expenses. PLEASE NOTE, ONE CANNOT SELL A STRUCTURED SETTLEMENT RELATED TO WORKERS COMPENSATION AS THIS IS NOT PERMITTED BY LAW.
- One of the biggest advantages is that both the principal and interest that accrues over time are exempt from taxes, so more money can be received over time.
- Payments can be scheduled to start right away, be deferred into the future and go on for any set length of time to cover anticipated future expenses or as an income supplement.
- Structured settlements are fixed payments paid by top rated insurance companies so they are thought to be dependable in most economic situations.
- Lack of flexibility. Typically, once terms are set there is no flexibility and you must wait months or years to get paid.
- When emergencies arise or cash needs occur unexpectedly, it is not possible to access the funds in order to get money to handle those new expenses.
- When there are investment opportunities, you are stuck on the sidelines even though you are entitled to receive money in the future.
- If we enter a period of higher inflation or rising interest rates the value of your structured settlement may well deteriorate and you may lose money.
- While the insurance companies are generally reliable, insurance companies can go into liquidation and there have been at least two instances of this in the past.
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Structured Settlements Involving Minors
Before structured settlements were used to pay for the financial awards in personal injury cases that involved minors, defendants would make those payments to the parents of the children. That gave them the complete control and access to that money, and it was often spent irresponsibly.
As a result, timed payouts are used in these cases in order to ensure that the minors will be able to continue to count on that money in the future.
There are laws in 48 States that protect the rights of those who receive structured settlements, and these state laws while similar, do differ somewhat. Make sure you understand your rights applicable to you in your State.
S. 5891 of the Internal Revenue Code, enacted in 2002, reaffirms your right to receive cash proceeds from the sale of your structured settlement future payments tax free in most circumstances. This provision also places a tax penalty on funding companies who do not transact secondary market transaction in accordance with the applicable State laws. The provision is designed for your protection.
This was put into place after 9/11 victims and their families began receiving financial compensation. It provides them with counseling and instruction that they can use to make wise decisions before selling off any structured settlements.