STRUCTURED ANNUITY SETTLEMENT
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What
Is a Structured Settlement?
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.
A structured settlement is a stream of
payments to a person who won or settled a lawsuit. The defendant funds the
settlement. These resolutions differ from lump-sum settlements because of the
way the money is paid over time.
If the amount of money is small enough, the wronged party
may have the option to receive a lump sum settlement. For larger sums, 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 agreement details the series of payments the person
who was wronged will receive as compensation for the harm done to them.
Spreading 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.
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 are:
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 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 family members who claim loved ones were victims of wrongful deaths.
Families may be entitled to receive a stream of tax-free payments, to replace
income after a loved one’s death.
Structured settlements — or structured annuities — are
both financial products and legal judgments. 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 on 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 their use.
Structured
Settlements for Minors: Read about why this type of settlement
is typically used in cases involving children.
Payout
Options for Structured Settlements
If you elect to receive your lawsuit payout through a
structured settlement, you can determine whether to begin to receive the funds
immediately or at a later date. Immediate payments can be beneficial if you
require medical care, for example, or have lost your source of income. You may
decide to postpone the payments until a later time, such as after you retire.
During the waiting period, the annuity will grow as it earns interest.
You can also determine whether the annuity should be paid
for the rest of your life, no matter how long that may be, or for a specified
number of years.
You can also determine when you set up the annuity the
schedule for receiving payments and whether the payments should go up or down
over time.
Structured
Settlement Pros and Cons
Structured annuities are
ideally suited for many different types of cases. For additional information on
how work, payout options, or how to access your cash ahead of the annuity
contract schedule, the Structured Settlements FAQs page can be a beneficial
resource.
These scheduled payments
offer a number of advantages. When deciding on any financial investment, it is
important to understand the benefits along with the risks.
Pros of Structured
Settlements
Payments are tax-free.
In the event of the recipient’s
death, the heir can continue to receive 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 do not fluctuate with market changes.
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 of Structured
Settlements
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 place a 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 through administrative fees.
Options
for Annuity Owners to Sell Payments
You should carefully
consider the terms of your annuity because they can’t be renegotiated after the
contract has been issued. That can limit your options if your financial
situation changes due unemployment, illnesses or other setbacks.
However, annuity owners may
have the option to get cash in advance of their contract schedules. Owners may
sell some or all payments to structured settlement buyers. Such sales must be
approved by a judge. The role of the judge is to decide if the sale is in the
best interest of the annuity owner.
Other rules may apply
depending on the details of your annuity contract and the laws of the state
where you live. The Structured
Settlement Protection Act of 2002 provides federal guidelines on such
transactions.
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