A Structured Settlement is an alternative to a lump sum cash payment in the resolution of personal physical injury, wrongful death, and workers’ compensation cases.
The settlement usually consists of two components; an up front cash payment to provide for immediate needs, and a series of future periodic payments. These payments are funded by the defendant’s purchase of an annuity policy from a highly rated life insurer who makes the periodic payments directly to the plaintiff.
There are two major advantages that structured settlements offer. First, the IRS in Code Sections 104 and 130 provides for periodic payments in personal physical injury and workers compensation cases to be income tax-free to the plaintiff. Second, structured settlements prevent plaintiffs from dissipating settlement proceeds. Studies show that most people have spent their cash settlement within five years even though their fixed financial needs continue.
A structured settlement is most advantageous when you:
- Need to pay for continuing and/or future medical expenses.
- Require replacement of lost future income.
- Desire a secure lifetime tax-free income.
- Have little or no experience managing money.
Additional advantages of a structured settlement include:
- Receipt of a larger amount of money over time than would be obtained in a cash settlement.
- Guaranteed regular payments with lifetime income and period certain options.
- Income plans tailored to meet future needs.
- Medical underwriting which can make your money go farther.
- Low investment risk.
- No volatility.
- No money management fees and expenses.
- Greater financial peace of mind.
- Inflation protection.
In cases involving a minor or incompetent, the courts usually require some protection of the settlement proceeds on behalf of the minor. They may not allow payments to be made directly to the minor until he or she reaches the age of majority nor allow parents or guardians to take receipt of the funds. A structured settlement may be the best solution.
Why are periodic payments desirable?
Some reasons include:
- To prevent premature dissipation of the settlement. Settlement funds are often intended to replace lost income and provide for future needs that may last for a lifetime. Experience has shown that without proper management and controls, most people who receive lump sum settlements have spent their proceeds within a short period of time.
- Tax advantaged income. When properly designed, these products can provide tax-free or tax-deferred income.
- Courts and parents of minor children often want to put settlement proceeds in a financially secure vehicle that provides guaranteed future payments.
- Having a stable, predictable and often guaranteed income stream tailored to individual needs provides greater financial peace of mind.
Structured settlement annuities are offered by the most respected and highly rated insurance companies in the world.
