Understanding Structured Settlement

Simon Wong Blog

A structured settlement is an arrangement with an insurance company to make periodic payments in exchange for settling a personal injury claim. This type of compensation first appeared in the 1970’s as an alternative to lump sum settlements. They are now part of the statutory tort law of many countries, including the United States. These are sometimes called “periodic payments” and if awarded by a judge at the end of a trial, it is called a “periodic payment judgment”.

Insurance companies are the most common entities that arranged structured settlements. Usually they will purchase an annuity for the purpose of making the payments. Many times, the insurance carrier purchasing the annuity will receive a rebate, commission or both with the annuity. A good lawyer will stipulate, if possible, that any rebates or commissions involved in the structured settlement be paid to the defendant.

There are several benefits to structured settlements; some are tax-free and some can reduce the plaintiff’s tax obligations as a result of the judgment. It protects the plaintiff’s funds from being used up and also from themselves—some people just aren’t good at handling large sums of money or saying no to relatives that want to “share the wealth”, so to speak. If the client has been severely injured and faces long term care and disability, a structured settlement is most likely an ideal solution to cash flow problems he is likely to encounter. It’s also possible such a plaintiff would be better off with a special needs trust rather than a structured settlement, especially if they will be benefiting from Medicaid or other type of public assistance.

Minors benefit from these settlements, too. As well as providing necessities as they are maturing, a structured settlement can pay for college and other important needs. A reputable financial planner can be a real asset in arranging such expenses.

There are just a couple of disadvantages to a structured settlement, the first being completely subjective. Some people feel constrained by the schedule of payments involved, especially since they may have been planning to buy a new house with their settlement or other big ticket item that would consume the entire settlement. Some also feel that investing that money would give better long-term return than the annuities that the defendant had purchased.

Many people will be approached with offers to buy their structured settlements but about two thirds of the states have laws restricting the sales and tax-free settlements are severely restricted when it comes to their sale to a third party. Some insurance companies refuse to transfer the annuities to a third party. And indeed, those who offer to buy annuities aren’t extending that offer to benefit the seller!

Structured Settlements can be a very beneficial way to resolve a lawsuit, to both parties.

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