I received a letter in the mail the other day from some legal firm saying that they were on the verge of winning a class action suit against a large medical corporation and that I could be entitled to part of their structured settlement; if I could prove I had used a particular cholesterol drug. Personally, I don’t remember using this drug and I think I was not the intended recipient, but my interest got perked by the term structured settlement. Being a finance aficionado, I hate not knowing what a particular concept is, so I did some research on this topic. Wikipedia defines a structure settlement as “ …a financial or insurance arrangement, including periodic payments, that a claimant accepts to resolve a personal injury tort claim or to compromise a statutory periodic payment obligation.”
Not very clear I agree. But basically a structured settlement is a way to settle financial payments from a legal case (settlement) that are made over a period of time (structured). It offers several advantages over a one-time, lump sum payout. This includes the money lasting longer, with studies showing that the majority of those who receive lump-sum payments as compensation for an accident or injury spend the money within five years. A structured settlement on the other hand is like an annuity (think life insurance) than can be spread out over decades, or a lifetime.
Another big advantage of a structured settlement is that the income is tax-free, both at the Federal and state levels. Structured settlements are often ideal under the following circumstances:
- Guardianship cases where the victim dies and leaves minor children. A structured settlement can insure that funds are available for food, housing and education for the surviving family members over a long period of time.
- Workers compensation cases where the injured party is unable to work for a protracted length of time. A structure will allow steady income to insure that the victim and their family will continue to have steady income.
However, remember that once in place, can structured settlements cannot be traded back for a lump sum settlement. Because you are given special tax treatment with regard to structured settlements’ proceeds, you cannot then take that in a lump sum fashion.
Why do parties choose structured settlements over a one off lump sum payout? The party that pays in an accident or injury case can benefit from payments over time, as they can set up an annuity to pay the funds over time. The funds are invested with the payments coming out of the proceeds. It’s “hands off” for the paying party, and they typically pay out a smaller amount of money in present dollars than if they paid in a lump sum.
There are many things to consider if you are in a position to receive a large amount of compensation for injury or accident. One of the options may involve structured payments over time because using a tailored stream of payments, provides long-term tax- free income, often for a lifetime. Before you act though, you should learn as much as you can about legal settlement payment options in order to determine if such an agreement is right for you. As always, should you find yourself in such a situation, consult with a financial advisor and/or a competent attorney.
Got Questions? Leave a comment and I will try and find you some information.
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A structured settlement is a large amount of money awarded to an individual with a specific payout schedule. The funds are disbursed over a period of time rather than given in one large amount to help the recipient pay for living expenses and monthly bills if the award was made through litigation.
Structured settlements can be generated from lottery payouts, insurance awards or inherited annuities from a relative’s estate. The bottom line is that a structured settlement is a monthly income stream that continues throughout the term of the agreement.
However, as anyone knows unforeseen situations do come up that may require access to more cash than a person has in the bank. Usually a loan is taken out as mortgage on the home or unsecured debt in the form of credit cards etc. but, you can also take a loan against your structured settlement payments you receive as well. If you have access to a monthly income stream through a structured settlement, you can sell all or part of these payments to get a larger amount of money in a shorter time period.
Unfortunately, there are downsides to this type of arrangement that everyone should be aware of before pursuing this type of agreement.
1. There are many companies out there who will gladly pay you a lump sum to receive the monthly income stream. But the cost of getting your money early may be extreme. These companies will pay you a discounted rate for the purpose of making a lot of money over the life of the annuity.
2. Structured Settlements were designed to provide a way for an individual to manage their money and provide a consistent source of funds to pay bills and etc. Receiving a single amount of money can be an extreme temptation to blow the money on luxury items rather than what is was meant for.
3. Accepting a large amount of money through a settlement loan may trigger significant tax burden to the individual that received the money. This alone can be a reason to avoid a structured settlement loan.
If you are receiving a monthly income stream from a structured settlement and want to get the money faster, there are several reasons to proceed carefully before signing an agreement.