How Does a Structured Settlement Work?

A plaintiff receives a structured settlement after successfully winning a lawsuit against a defendant. In many cases, the defendant purchases an annuity from an insurance company, which is then responsible for the series of payments. Instead of getting a lump sum, you’ll receive fixed payments over a set time.

Structured Settlement Payout Options

A structured settlement annuity is typically offered when a person is awarded a large amount of money. Smaller settlement awards are typically paid out in one payment.

Benefits of Structured Settlements

  • A structured settlement can provide greater financial stability, especially in cases involving long-term injury or disability.
  • The structured settlement payments are tax-free.
  • Structured settlement annuity accounts gain interest.
  • The settlement helps to replace any lost income experienced by the plaintiff.
  • The payments can pass to a survivor after the death of the beneficiary.
  • The payment does not fluctuate with market conditions.
  • Lowered risk of making bad financial choices when compared to receiving a large lump sum.

Disadvantages of a Structured Settlement

  • Little flexibility once the settlement terms are established.
  • Hard to use monthly payments as an emergency fund compared to a lump sum payment
  • Low interest earned compared to other investment vehicles.
  • You can negotiate a settlement buyout but will receive less than you would under the structured settlement based on the purchasing company’s discount rate.

Issuers of Structured Settlement Annuities

  • New York Life
  • Berkshire Hathaway
  • Prudential Financial
  • Liberty Mutual
  • Symetra
  • Allstate
  • Metlife
  • AIG
  • Mutual of Omaha
  • Pacific Life
  • USB Financial

How are Structured Settlements Taxed?

Due to the Periodic Payment Settlement Act of 1982, nearly all structured settlements resulting from personal injury lawsuits are free from US federal income tax. Structured settlements are not taxed because the federal government views such payments as restorative, righting a wrong done to you, not income.

What Happens If A Beneficiary Takes Over?

Including a death benefit provision in a structured settlement allows any guaranteed payments to pass to a beneficiary upon the settlement owner’s death. The transfer will not usually trigger taxation, though very large estates may have an estate tax due. Payments received from the structured settlement remain non-taxable for the beneficiary.

Cases That Result in a Structured Settlement

Common types of court cases that could result in a structured settlement for the plaintiff include:

1. Personal Injury

A personal injury lawsuit is a civil case in which a plaintiff has been harmed and is seeking money from the defendant, whom they believe to be responsible for their injury. Oftentimes, plaintiffs in personal injury lawsuits are awarded a structured settlement to cover medical expenses or other ongoing costs.

2. Medical Malpractice

A medical malpractice structured settlement is compensation given to an individual harmed due to a doctor’s negligence. The structured settlement pays the injured party for a certain period.
The settlement provides the individual with a reliable source of income that can help pay related medical bills and other financial needs.

3. Wrongful Death

A wrongful death claim may be filed when the victim’s death was caused by the direct actions or negligence of another party. Wrongful death cases often end with a settlement agreement or a compensation award. When a large sum of money is awarded, the amount is usually paid out as a structured settlement.

When a wrongful death occurs, the surviving family members, such as the spouse and children, often experience financial difficulty due to lost income. Choosing a structured settlement means ongoing payments that can help maintain the standard of living the family is accustomed to. Any guaranteed settlement payments can pass to an heir, should the plaintiff pass away before the guaranteed minimum number of payments is made.

4. Worker’s Comp

Worker’s compensation laws protect injured workers. These laws require employers to carry insurance to cover claims in case a worker becomes injured on the job. When an injured employee is awarded a worker’s compensation settlement, they may receive a lump sum payment or be offered a structured settlement.

A worker’s compensation structured settlement is meant to partially replace the worker’s lost wages, whether due to a temporary injury or permanent disability.

What Should Be Known About Structured Settlements for Minors?

Until they become adults, minors have little to no say in how their structured settlement is set up or spent. Instead, the minor’s parents or guardian remain in control of the structured settlement and must spend the money according to the specifications ordered by the judge. Once they become adults, minors can take control of their structured settlements.

The Judge Stipulates How the Money Will Be Spent

The main goal of a structured settlement is to ensure the minor has money for their future. A judge holds the parents or guardian to specific guidelines on how to spend the money for the benefit o the child.

Lump sums can more easily be spent before the child turns 18, so creating a structured settlement incorporates an extra level of financial protection.

Selling A Structured Settlement

While a structured settlement may work well initially, it does not account for changes to your financial situation. Monthly payments over several years might not suffice to immediately pay off debt, buy a house or car, or cover a major medical event.

It is possible to sell your entire structured settlement for a lump sum. Alternatively, you can sell some of your payments to cover a short-term need, then continue to receive payments in the future.

Obtain offers from multiple structured settlement buyers to get the best deal. Purchasing companies base their charges on a discount rate, which can vary among offers. Usually between 9% and 20%, the discount rate is primarily based on the purchasing company’s expectation of future interest rates. The discount rate then applies to your future payments to determine the amount you receive.

Structured Settlement Laws

Periodic Payment Settlement Act

Multiple laws protect the rights and interests of structured settlement recipients. The Periodic Payment Settlement Act of 1982 allows individuals to receive their structured payments tax-free. However, alternating structured payments voids their tax-free status.

Additional Laws Were Put Into Place

In the 1990s, many advertisements offered structured settlement recipients the option of receiving a lump sum instead of monthly payments. Much of this advertising was misleading or highly aggressive.

Structured Settlement Protection Act

Protection at the State Level

Many laws protect individuals who hold structured settlements. Laws vary by state but often include the following provisions:

  • Structured settlement buyers must tell the seller the difference between the sale price and the sum of remaining structured settlement payments.
  • Transfers of structured settlement payments are subject to judicial review to ensure they’re in the settlement holder’s best interest.
  • A disclosure statement must clearly summarize the terms of the transaction.
  • A cooling-off period gives the individual time to cancel the sale.

Some states require individuals to seek out an independent professional advisor to ensure they fully understand the implications of selling their structured annuity. Other states only recommend this counseling rather than require it.

The Federal Structured Settlement Protection Act

Despite its name, the Federal Structured Settlement Protection Act is an industry agreement and not federal law. Major industry associations voluntarily agreed to self-regulate to protect structured settlement owners.

Individuals need to ensure any proposed transaction complies with their state’s laws and regulations. State laws can help protect you and ensure the transaction isn’t blatantly unfair.

State Laws Protect Structured Settlement Recipients

A structured settlement can provide long-term financial security. State laws help protect structured settlement holders from misleading or predatory settlement buyers. With knowledge of these laws, structured settlement recipients can safeguard their money when selling a structured settlement.