Structured settlements have become a natural part of workers’ compensation and personal injury claims in the United States, according to the National Structured Settlement Trade Association (NSSTA). In 2001, NSSTA life insurance members issued more than $ 6.05 billion of annuities issued as settlements for physical injury claims. This represents a 19 percent increase over 2000.

A structured settlement is the dispersal of money for a legal claim where all or part of the settlement requires future periodic payments. The money is paid in regular installments, annually, semi-annually or quarterly, either for a fixed period or during the life of the claimant. Depending on the needs of the person involved, the structure may also include some immediate payment to cover special damages. Payment is generally made by purchasing 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 series of tax-free payments tailored to their needs. Historically, they were first used in Canada and the United States during the 1970s as an alternative to balloon 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 resolves a case for a large sum of money, the defendant, the plaintiff’s attorney, or a financial planner may propose to pay the settlement in installments over time rather than in a single lump sum.

A structured settlement is actually compensation. Injured individuals and / or their parents or guardians work with their attorney and an outside broker to determine future life and medical needs. This includes all upcoming operations, therapies, medical devices, and other health care needs. An independent third party then purchases and maintains an annuity that makes the payments to the injured person. Unlike stock dividends or bank interest, these structured settlement payments are completely tax-free. Also, the individual’s annuity grows tax-free.

Pros and cons

As with everything, there is a positive and a negative side to structuring settlements. A significant advantage is tax avoidance. When set up properly, a structured settlement can significantly reduce the plaintiff’s tax liabilities (as a result of the settlement). Another benefit is that a structured settlement can help ensure that the plaintiff has the funds to pay for future care or needs. In other words, a structured settlement can help protect the plaintiff from himself.

Let’s face it: some people have a hard time managing money or saying no to friends and family who want to “share the wealth.” Receiving money in installments can make it last longer.

One downside to frame settlements is the built-in frame (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, but don’t have the funds to do so. They cannot borrow against future payments under their agreement, so they are stuck until their next installment payment arrives.

And from an investment perspective, a structured deal may not make more sense for everyone. Many standard investments can provide a higher return in the long term than annuities used in structured settlements. So some people are better off accepting a lump sum deal and then investing it themselves.

Here are some other important points to keep in mind about structured settlements: An injured person with long-term special needs can benefit from having regular lump sums to purchase medical equipment. Minors can benefit from a structured settlement that provides for certain costs when they are young, such as education expenses, rather than during adulthood.

Special Considerations

– Injured parties should beware of potential exploitation or dangers associated with structured settlements. They should carefully consider:

– High Commissions: Annuities can be very profitable for insurance companies and often carry very high fees. It’s important to make sure that the fees charged when setting up a structured deal don’t consume too much of your capital.

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

– Conflict of interest: There have been situations where the plaintiff’s attorney has referred the client to a particular financial planner to establish a structured settlement, without disclosing that they would receive a referral fee. In other cases, the plaintiff’s attorney has entered into a structured settlement on behalf of a client without disclosing that the annuities are being purchased from his own insurance company. Plaintiffs should know what financial interest their attorney may have in connection with any financial services that are provided or recommended.

– Use of several insurance companies: It is advisable to buy annuities for a structured settlement from several different companies. This offers protection in the event that a company that issued annuities for a settlement package goes bankrupt and does not pay.

Benefits of selling a deal

A structured settlement is specifically designed to meet the needs of the plaintiff at the time of its creation. But what 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 deal. Many businesses can purchase all or part of your remaining periodic settlement payments for a lump sum. This can increase your cash flow by providing funds that you can use right away to buy a home, pay for college tuition, invest in a business, or pay off debt.

If you are considering cashing your structured settlement, contact your attorney first. Depending on the state you live in, you may need to go to court to get approval for the purchase. 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 do not assign or transfer annuities to third parties.

When selling your structure sale, check with multiple companies to ensure you get the most reward. Also, make sure that the company that buys your settlement is reputable and well established. And keep in mind that if the deal seems too good to be true, it probably is.