Financial Security through Structured Settlements

Structured settlements have become a natural part of personal injury and worker’s 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 … Continue reading “Financial Security through Structured Settlements”

Structured settlements have become a natural part of personal injury and worker’s 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 installments–annually, semi-annually or quarterly–either 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 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. What’s more, the individual’s annuity grows tax-free.

Pros and Cons

As with anything, there’s 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.

Let’s 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 they’re 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 they’re young–such as educational expenses–instead of during adulthood.

Special Considerations

– Injured parties should be wary of potential exploitation or hazards related to structured settlements. They should carefully consider:

– High Commissions – Annuities can be highly profitable for insurance companies, and they often carry very large commissions. It is important to ensure that the commissions charged in setting up a structured settlement don’t eat up too much of its principal.

– Inflated Value – Sometimes, the defense will overstate the value of a negotiated structured settlement. As a result, the plaintiff winds up with much less than was agreed upon. Plaintiffs should compare the fees and commissions charged for similar settlement packages by a variety of insurance companies to make sure that they’re getting full value.

– Conflict of Interest – There have been situations where the plaintiff’s attorney has referred the client to a particular financial planner to set up a structured settlement, without disclosing he would receive a referral fee. In other cases, the plaintiff’s lawyer has set up a structured settlement on behalf of a client without revealing the annuities are being purchased from his own insurance business. Plaintiffs should know what financial interest their lawyer may have in relation to any financial services being provided or recommended.

– Using Multiple Insurance Companies – It’s advisable to purchase annuities for a structured settlement from several different companies. This offers protection in the event a company that issued annuities for a settlement package goes into bankruptcy and defaults.

Benefits of Selling A Settlement

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. Many companies can purchase all or part of your remaining periodic settlement payments for one lump sum. This can boost your cash flow by providing funds you can use immediately to buy a home, pay college tuition, invest in a business or pay off debt.

If you’re considering cashing out your structured settlement, contact your attorney first. Depending on the state you live in, you may have to go to court to get approval for the buyout. About two thirds of states have laws that limit the sale of structured settlements, according to the NSSTA. Tax-free structured settlements are also subject to federal restrictions on their sale to a third party, and some insurance companies won’t assign or transfer annuities to third parties.

When to Sell Your Structured Settlement

structured settlement often follows a life changing incident, whether it be positive or negative. Due to these circumstances, you may be faced with the need for a large lump sum payment rather than small monthly payments over a number of years. So, where do you turn? To a company that can buy your structured settlement from you and turn it into an immediate payment that you may use on whatever you see fit.

Each individual has different reasons for wanting to sell their structured settlement, however, first you must decide if it is the right decision for you.

The Benefits of Selling Your Structured Settlement

A large portion of those who receive a structured settlement can benefit from selling it for a lump sum payment. The situations listed in this section represent possible circumstances of individuals that may get the most rewards from selling their structured settlement.

· If you cannot wait to receive small, spread-out payments over a long period of time due to a dire financial situation or hefty medical bills and/or lawyer fees. Many of the situations that can bring about a structured settlement can also stick the individual with such obligations.

· If you and your family decide that this is the time to finally make that large purchase that you have had your eye on. For example, if you have previously been denied mortgages or loans and would like to take this opportunity to buy that dream home you have always wanted. Or if you have a child or children who are preparing to go off to college and you fear you may not have the financial means to support that dream otherwise.

· If you have talked with a financial advisor and both of you feel that you could profit more by investing a lump sum payment, rather than waiting on monthly payments. If the money is invested properly, there is a chance that you could end up with more money in the end than your settlement was ever worth. However, this should not be a plan that is entered into lightly. You should work closely with a financial specialist and feel confident that you have found a great opportunity to invest in.

· If you are of older age and feel that you may not be around long enough to receive a fair amount of your structured settlement. You may want to the chance to enjoy the benefits of your settlement or may want to secure part of it for your family after your passing. This way you can distribute the funds as you see fit instead of relying on lawyers or courts.

· If you don’t plan to use the money right away, but would rather put it into a savings or money market account to draw interest. This would be best suited for someone who has a very hefty settlement, can find an account with large payoff terms, and plans to keep the majority of the money in the account for many years.

No matter what your reason for wanting to sell your structured settlement, choosing this option puts you back in control of money that is rightly yours. The problem that many individuals have with their structured settlements is that the control over their money is left to lawyers, courts, and the company or persons paying out the settlement. You are now able to say where, how, and – most importantly – when you spend your money.

The Drawbacks of Selling Your Structured Settlement

For a few individuals, selling their structured settlement and receiving a lump sum payment may not be in their best interest. One must also evaluate these situations and determine if they outweigh the reasons you are considering selling your settlement.

· First and foremost, selling you structured settlement means that you will receive less money than you would if you were to keep it. However, for many people considering this option, this seems like a win-win situation – they will get one large lump sum payment and the company they sold it to will make a profit in the end. The good news is that since you have several companies competing for your settlement, you can choose the one that will give you the a portion of the full settlement that you can live with.

· Because you may lose out on a substantial portion of your settlement by selling it, if you are in a financial situation where regular monthly payments will only be a bonus on top of what you already make, waiting out your settlement may be in your best interest. However, if you’re a senior, then you should also take your age and the length of your structured settlement into consideration. This would be the ideal situation for someone who is young enough that they have a great chance of living out the life of their settlement.

· If you are a person who is poor at managing large sums of money, then selling your structured settlement may not be right for you. For example, if you are the kind of person who gets a large paycheck every two weeks and finds themselves running low on available cash at the end of those two weeks, then that may be an indication that needs to be closely looked at. In this type of circumstance, having your settlement portioned out to you on a monthly basis may keep you from spending it too quickly. Once your settlement is gone, you will be back at square one.

· For those reasons, you should also not consider selling your structured settlement if you have an addiction to gambling, shopping, or drugs.

· If your settlement was due to an accident that has put you out of work and the funds from it will replace your monthly income, then keeping the payments on a monthly basis may help your family keep your finances in order. However, even in this situation selling your settlement may be best for you if you would like to renegotiate your payments into a larger sum each month to shorten the life of the settlement.

Most individuals receiving a structured settlement can benefit from selling it to a company that can give them a large lump sum payment or shorten the life of the settlement, especially if they are older persons, an individual who has enormous expenses due to an accident or court case, someone in a critical financial position, or one who wishes to make a large purchase for themselves and their family. Finding the right company with terms that fit your needs is a key component of making your experience with selling your structured settlement a positive one