what is a structured settlement

What is a structured settlement?

March 10, 2022 2:40 pm Published by Leave your thoughts

Structured Settlements are a way of paying accident victims over time instead of in one lump sum. For federal cases, they were authorized by congress in 1982 and include:

  • An agreement between the injured person and the defendant.
  • The injured person does not receive compensation for their injuries in one payment under a structured settlement. Instead, they’ll get a steady stream of tax-free payments to cover future medical costs and basic living expenses.
  • A structured settlement can be privately agreed to (for example, in a pre-trial settlement) or mandated by a court order, which is common in cases involving kids or individuals under a guardianship

Insurance companies, plaintiffs, and defendants are all becoming more interested in structured settlements. The structured settlement provides the receiver with a steady stream of possibly tax-free or creditor-resistant payments that might endure for years or perhaps a lifetime. The cash required to purchase the annuity by the insurance company or other individual who created the structured settlement may sometimes be less than the damages granted.

A structured settlement can be designed in a variety of ways. For example, payments can be set to grow at certain intervals, such as when surgery is required or when substantial medical bills are anticipated later in life. In addition, the payments can be indexed at a fixed interest rate or linked to the Consumer Price Index to account for inflation. A succession of lump-sum payments can also be included.

How Do Structured Settlements Work?

In structured settlement periodic payments are given through a financial product known as an annuity. There are two options for payout legal settlements. Long-term financial security and taxation are the main distinctions between these settlement choices.

When a plaintiff obtains a lump-sum award, they may spend it too quickly, robbing them of the long-term financial security that future installments could bring.

Furthermore, any interest and dividends produced would be taxed if the lump sum were invested. On the other hand, an annuity is designed to provide income to the beneficiary for the remainder of their lives, and any interest and taxes received through the annuity will often grow tax-free. (Please not that you should consult a tax professional for advice regarding your specific structured settlement, as the tax treatment can vary based on numerous factors).

The following are examples of cases that may result in a structured settlement: 

Severe Personal Harm: Studies demonstrate that the more serious the injury, the more probable a structured settlement, rather than a lump payment, will be awarded.

Cases involving workers’ compensation: If you’re hurt on the job, a court can award you a structured settlement to cover your damages. 

Wrongful Death: If a court finds that someone is to blame, the victim’s surviving family members may be granted structured compensation.

Pros and Cons of Structured Settlements

Structured annuities are well-suited to a wide range of situations. Although these pre-arranged payments have various advantages, it is critical to weigh the rewards against the risks before making any financial decision.

Structured Settlements’ Advantages

  • Payments may not subject to taxation (again, always consult a tax professional as to how taxes will apply).
  • Even if the recipient dies, the beneficiary can continue to receive often tax-free payments.
  • Payments can be set up for practically any time, and they can start right once or be deferred for as long as you choose.
  • Spreading payments out over time might lessen the desire to buy huge, lavish items while also ensuring future revenue. In addition, if the beneficiary has a medical condition that may necessitate long-term care, this is very beneficial.
  • Structured settlements, unlike stocks, bonds, and mutual funds, are usually not affected by market fluctuations. The payments are guaranteed by the insurance company that supplied the annuity. 
  • A structured settlement sometimes pays out more in total than a lump-sum payment because of the interest your annuity may generate over time.

Structured Settlements’ Disadvantages

  • You won’t be able to change terms once they’ve been finalized if they don’t match your needs. If your financial status or the wider economy changes, you will be unable to renegotiate the terms.
  • In an emergency, funds are not immediately available, and the recipient cannot invest a lump-sum distribution in higher-yielding investments.
  • If you need cash right away, you can sell your payments, but they will be offered at a discount. This means that the money you get from selling the payments will be less than what you would have gotten from future payments.
  • In order to form a structured settlement or lump-sum annuity, not all jurisdictions require insurance firms to reveal their expenses. A recipient could lose a lot of money due to administrative fees if they don’t have this information.

If you have questions about structured settlements or are seeking answers to a personal injury problem, contact our experienced Concord, New Hampshire personal injury attorneys.

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This post was written by Cohen and Winters

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