Structured Settlements are an effective solution for compensating injury victims and survivors in wrongful death cases.
Once an injury victim and an insurance carrier agree to an amount to compensate the victim, a Structured Settlement can create a tailored stream of payments designed to help meet the victims’ or survivors’ ongoing financial needs. Before Structured Settlements, the only option was an immediate cash settlement in the form of a lump sum payment. To avoid the challenges and worry that come with managing a large sum of money, especially when the victim is a child or is disabled, Structured Settlements were developed to protect a steady stream of income planned to meet the individual’s specific needs over a longer period of time.
What is a Structured Settlement?
In a Structured Settlement, a liability insurer transfers the money agreed upon in settlement to another insurer, usually a very highly rated life insurance company, which then guarantees long term payments to the victim or survivor. The liability insurer purchases an annuity from the life insurance company, which makes the payments directly to the victim or survivor. Oftentimes, the life insurance company assigns the obligation to make those payments to a sister company, another equally highly rated insurance company. Payment plans may include an up-front lump sum with the rest being paid bi-weekly, monthly, quarterly, semi-annually or annually. The payments can be scheduled for a designated period of time, or for the claimant’s lifetime. Future lump sum payments can be scheduled to address large costs yet to come, including medical expenses, educational expenses, medical equipment or modified vehicles and cost-of-living adjustments. To be tax-free, the payment schedule must be determined before the settlement is finalized. Payments may not be increased, decreased, deferred, or accelerated.
Who benefits most from a Structured Settlement?
A Structured settlement should be considered an option in most cases involving large settlements in compensation for personal physical injury and are particularly appropriate in cases involving:
- Temporary or permanent disability,
- Wrongful death-especially in situations where surviving family members require monthly or annual income,
- Minors or incapacitated adults,
- People unfamiliar or uncomfortable with managing large sums of money.
How do Structured Settlements work?
An illustration: When a 45 year-old husband and father was seriously injured in an accident, he was forced to take time off from his job at a manufacturing company. When his case settled for $300,000, he needed to decide whether to accept a lump sum or a structured settlement. His structured settlement from the $300,000 was as follows.
|Cash to victim at time of settlement||$15,000|
|Net recovery to be invested in a Structured Settlement||$185,000|
|Benefits:||a. $500 per month for 20 years guaranteed with a 3% cost-of-living adjustment to assist with monthly expenses (years 1-20)
b. $15,000 per year for four years guaranteed to assist with son’s college tuition (years 5-8)
c. $50,000 lump sum at retirement (year 20)
|Total Guaranteed Structured Settlement
|$271,222.25 (includes income-tax free growth of $86,222.25)|
|Total Settlement Value||$386,222.25|
|Value increase is based upon a 3.51% rate of return|
What are the benefits of a Structured Settlement?
Structured Settlements protect the large sums of money associated with personal injury or wrongful death settlements from poor investment and money management decisions. They provide security and predictability in the following ways:
- Tax-free periodic payment streams designed to meet the individual’s needs;
- Financial security which comes with an annuity purchased from a highly rated, financially secure, major insurance company;
- May lead to quicker settlements to avoid the risks associated with jury trials; and,
- May lessen expenses associated with resolving a claim.
What are the risks of a Structured Settlement?
A Structured Settlement is an extremely safe investment. It will provide the benefits which it is contracted to provide. However, there are some limited risks involved. They include:
- There is no inflation protection. If interest rates increase considerably, then the value of the payments can be eroded over time, especially if the funds are invested during a period of exceptionally low interest rates.
- Unless the funding mechanism is protected by a trust or a conservator, it is possible for a recipient to cash out the Structured Settlement. This happens when the recipient accepts a steeply discounted cash payment from a vulture company which capitalizes on taking advantage of people who might wish to get their hands on the money in a lump sum. This amounts to further discounting what one could have received in an initial lump sum settlement.
- It is possible to protect a Structured Settlement from being dissipated by the recipient by requiring all payments be payable to a so-called “Spendthrift Trust”. In such a trust, the recipient has no individual power to cash out the Structured Settlement. It is a way to protect the settlement amount from dissipation.