Structured settlements have become a natural part of personal injury and workers compensation claims in the United States, according to the National Structured Settlements Trade Association (NSSTA). In 2001, life insurance members of NSSTA wrote more than $6.05 billion of issued annuities as settlement for physical injury claims. This represents a 19 percent increase over 2000.
A structured settlement is the dispersement of money for a legal claim where all or part of the arrangement calls for future periodic payments. The money is paid in regular installmentsannually, semi-annually or quarterlyeither for a fixed period or for the lifetime of the claimant. Depending on the needs of the individual involved, the structure may also include some immediate payment to cover special damages. The payment is usually made through the javascript:void(0)purchase of an annuity from a Life Insurance Company.
A structured settlement structure can provide long-term financial security to injury victims and their families through a stream of tax-free payments tailored to their needs. Historically, they were first utilized in Canada and the United States during the 1970s as an alternative to lump-sum payments for injured parties. A structured settlement can also be used in situations involving lottery winnings and other substantial funds.
How a Structured Settlement Works
When a plaintiff settles a case for a large sum of money, the defendant, the plaintiff's attorney, or a financial planner may propose paying the settlement in installments over time rather than in a single lump sum.
A structured settlement is actually a tradeoff. The individuals who were injured and/or their parents or guardians work with their lawyer and an outside broker to determine future medical and living needs. This includes all upcoming operations, therapy, medical devices and other health care needs. Then, an annuity is purchased and held by an independent third party that makes payments to the person who has been injured. Unlike stock dividends or bank interest, these structured settlement payments are completely tax-free. Whats more, the individuals annuity grows tax-free.
Pros and Cons
As with anything, theres a positive and negative side to structure settlements. One significant advantage is tax avoidance. When appropriately set up, a structured settlement may significantly reduce the plaintiff's tax obligations (as a result of the settlement). Another benefit is that a structured settlement can help ensure a plaintiff has the funds to pay for future care or needs. In other words, a structured settlement can help protect a plaintiff from himself.
Lets face it: Some people have a hard time managing money, or saying no to friends and family wanting to "share the wealth. Receiving money in installment can make it last longer.
A downside to structure settlements is the built-in structure (no pun intended). Some people may feel restricted by periodic payments. For example, they may want to buy a new home or other expensive item, yet lack the funds to do so. They can't borrow against future payments under their settlement, so theyre stuck until their next installment payment arrives.
And from an investment perspective, a structured settlement may not make the most sense for everyone. Many standard investments can provide a greater long-term return than the annuities used in structured settlements. So some people may be better off accepting a lump sum settlement and then investing it for themselves.
Here are some other important points to keep in mind about structured settlements: An injured person with long-term special needs may benefit from having periodic lump sums to purchase medical equipment. Minors may benefit from a structured settlement that provides for certain costs when theyre youngsuch as educational expensesinstead of during adulthood.
Financial Security through Structured Settlements
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64 comments:
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A structured settlement is specifically designed to meet the needs of the plaintiff at the time it’s created. But what happens if the installment arrangement no longer works for the individual? If you need cash for a large purchase or other expenses, consider selling your structured settlement.
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Annuity payment can be paid in equal installments and the installment amount can be varying in amounts. The payments made under structured settlement annuity do not come under the purview of income-tax and are guaranteed as contract. It is actually a long-term financial security and is a very safe method to pay annuity. Some of the factors considered by individuals are payment, duration, expenses, present age, occupation and retirement plans. Some of the structured payments cannot be altered once these are agreed by both the parties.
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