A structured settlement is a stream of payments to a plaintiff who won or settled a civil lawsuit after some injury or any other issue. The defendant funds the settlement. These resolutions differ from lump-sum settlements because the money is paid out over time to provide long-term financial security to the recipient.
Structured settlements gained popularity in the 1980s after the U.S. Congress passed the Periodic Payment Settlement Act. According to the National Structured Settlements Trade Association, almost $6 billion in new structured settlements are issued annually.
What Is a Structured Settlement?
Structured settlements are easy to understand and handle. You might have seen in the movies or even in real life when a civil lawsuit is implemented on any company or person, they try to cover it up.
This covering up of the lawsuit outside and sometimes inside the court results in structured settlements. These settlements are paid in the form of money to the one who has initiated a lawsuit. The company pays the price to right their wrongdoings and end the case from the court to save their reputation.
But remember all the structured settlements are tax-free payments that are granted to the plaintiff in a civil lawsuit. These payments are a way to provide long-term financial security to the injured party.
However, if the amount of money is small the company pays it all at once. But if the amount of money for the structured settlements is large, companies offer an annuity option through which they will keep on adding the amount to the account of the plaintiff. The plaintiff can then extract the amount every month whenever they want.
There will be an agreement in which all the details about the payments will be present. The person receiving the payment can check all the details and approve them. Moreover, the annuity method of structured settlement helps in spreading the money for a longer period to ensure financial security.
Working of Structured Settlements
Legal settlements can be paid out in a one-time lump sum or through a structured settlement where periodic payments are made through a financial product known as an annuity. The key differences between these settlement options are in the areas of long-term financial security and taxes.
The reason behind annuity structured settlements is that if the plaintiff gets payments in a lump-sum they might spend it too quickly. They can also get robbed and or can lose all the money in some gambling if they have that issue. This is why annuity settlements are the go-to solution for companies. In this way, they do not have to pay the amount at once and can keep adding the amount to the account every month. This avoids the sudden burden on them.
The most common cases which come under the structured settlements are as follow:
In this case, the person who has been injured files a case against the company or another person. They either then go to court directly and go to a private form to fix the issue and get the structured settlement money.
Most people know about workers’ compensation, which pays workers who get injured on the job while they recover. Payments can be used as wage replacement or to pay for medical treatment and other expenses during periods when injured employees are unable to work.
Well in some cases, if the doctor fails to perform the surgery correctly the patient can sue the medical staff or even the hospital. Then they in return pay the money to the patient or his/her family.
A structured settlement is also a common way to compensate family members who claim loved ones were victims of wrongful deaths. Families may be entitled to receive a stream of tax-free payments to replace income after a loved one’s death.
Payout Options for Structured Settlements
Well, the payout options come in two forms; either to receive it immediately or after some time. It all depends on the person receiving the structured settlement how he wants to receive it. Most people opt for the immediate payment method and link it to the annuity set up so that they receive the payment in intervals. You may decide to postpone the payments until a later time, such as after you retire. During the waiting period, the annuity will grow as it earns interest.
Moreover, you can also decide whether you want the annuity to be paid for your whole life or some specific years. If you choose limited years, the sum will increase and the whole amount is divided according to those limited years.
However, if the structured settlement is starting after some time and the plaintiff needs some money, he/she can ask for a pre-settlement amount to cover their expenses.
Structured Settlement Pros and Cons
Structured annuities are ideally suited for many different types of cases. Although these scheduled payments offer several advantages, it is important to understand the benefits along with the risks when deciding on any financial investment.
Pros of Structured Settlements
- There are no taxes on these Payments.
- Even if the person dies, the beneficiary can keep on receiving the payments.
- Plaintiff can schedule the payments for a longer period of time.
- They can include future lump-sum payouts or benefit increases.
- Plaintiff can spread out the payments for a longer period which can guarantee future income.
- Structured settlements do not fluctuate and they stay constant all the time even in the form of an annuity.
Cons of Structured Settlements
- Once the terms are finalized, the plaintiff cannot change or alter them. If he does he might face loss in the payments.
- Funds are not immediately accessible in case of an emergency, and the recipient cannot place a lump-sum payout in other investments that carry higher rates of return.
- You can also sell your payments if you need cash but these payments are sold at a discount rate even to the insurance companies.
- You will pay surrender charges and IRS penalties if you withdraw funds before age 59½.