A structured settlement, also known as a structured settlement annuity, enables a personal injury plaintiff to receive the proceeds of their compensation as a series of smaller payments over time, instead of as a lump sum. Periodic installments are not subject to income tax. The idea is to provide long-term financial security to someone who has been injured.
However, the process can seem confusing to a personal injury victim who has never encountered such an option. The concept and process will be explained below.
CREATING A STRUCTURED SETTLEMENT
In large settlements, the at-fault party can put the money owed to the plaintiff toward an annuity. This financial product guarantees an insurance company will issue regular payments over time. This guarantees financial support over time and can avoid spending the proceeds of a settlement too quickly.
Annuities provide other benefits as well. You can earn interest, so your proceeds will grow tax-free throughout the recipient’s lifetime. On the other hand, any investments you’d make from a lump sum amount would be taxed.
To use a structured settlement, a decision must be made to choose this route before the settlement agreement is finalized. Then:
- Both parties must agree to the fine details.
- If so, then the defendant or insurer is released from liability.
- Settlement funds are paid to a third-party assignment company.
- It purchases an annuity from a structured settlement
- Periodic payments are made per the agreed-upon amount and timeline.
STRUCTURED SETTLEMENT OPTIONS
In step with receiving periodic payments, you can also choose how your financial award will be paid. For example, you can request a larger initial payment to cover bills that are overdue, especially if you are unemployed. It can be used to purchase a car or pay off a mortgage. Subsequent payments will be smaller, but they can make up for lost income over time.
While many agreements involve receiving yearly income, additional amounts can be put towards paying for college tuition and other extraordinary expenses. Another option is to increase payment amounts over time, starting low and ending higher. Payments can also decrease over time, which can make sense if you expect your income to go up. Sometimes, plaintiffs even delay payments until retirement, so they’ll have adequate funds later.
HOW TO DETERMINE PAY STRUCTURE
Your attorney or financial advisor can help weigh various considerations, including but not limited to:
- Whether an award is taxable or tax-free. Compensation for injuries or illness is not taxable, while punitive damages are.
- If you plan to use the money right away, replace future income, or give it away to charity.
- Your ability to manage a large number of funds; payments over time can make things easier.
- The likelihood you’ll choose risky investments or spend on expensive luxuries.
- The chances of relatives, friends, and others pressuring you for a loan.
OTHER FACTS ABOUT STRUCTURED SETTLEMENTS
In addition to being tax-free, payments will go to selected beneficiaries following the recipient’s death. Payments can be spread out over just about any length of time and won’t fluctuate with market changes. They’re guaranteed by the insurance company and don’t work like stocks, bonds, and mutual funds. The settlement often yields more over time than a lump-sum payout as an annuity can acquire interest.
CAN I GET A LOAN ON A STRUCTURED SETTLEMENT?
Despite your contract schedule, there may be an option to get cash in advance, in the form of a structured settlement loan. A buyer, however, is really purchasing your settlement, ceasing regular payments. A judge must approve the sale. Another consideration is that annuity terms can’t be renegotiated after issuing a contract. This can be an issue if there’s a change in your financial situation.