What is a Structured Settlement
If you're looking for information about what is a structured settlement then you've come to the right place. Becoming educated about this financial tool is essential for individuals who have experienced personal damage or property loss, or those fortunate enough to win lottery jackpots.
Understanding what is a structured settlement and how it works helps individuals decide if this type of financial arrangement is suited for their situation. With that said, it's advisable to consult with a lawyer because settlements must comply with the Structured Settlement Protection Act.
Structured settlement annuity payments are offered to individuals who are awarded a large sum of money. This might stem from a personal injury lawsuit, worker's compensation, medical malpractice, divorce settlement or national lottery winnings.
Rather than receiving full compensation upfront, defendants receive fixed payments for a specific amount of time. Most often, annuity payments are provided as a way to compensate for lost wages and future medical expenses associated with personal injury.
Individuals receive guaranteed payments which are distributed according to the arranged payment schedule. In some instances, individuals also receive periodic lump sum payments. Annuities are usually purchased from a life insurance company to guarantee periodic payments.
Individuals will work with their attorney and structured settlement broker to establish payment schedules and amounts. One advantage is individuals can elect to receive equal installments or varying amounts and dates.
For example, an individual is awarded $250,000 for personal injury. They could receive a lump sum payment upfront, along with monthly payments for 10 years. They might want to add in an annual lump sum distribution. The payment schedule could be $50,000 lump sum upfront, $10,000 lump sum annually for 10 years, and $1250 monthly for 10 years.
There are many benefits associated with entering into structured settlement payments. When annuities are used to compensate individuals for personal injury the funds are tax free. If they are paid to an estate the funds are subject to estate tax.
Payment schedules can be established to suit the needs of the plaintiff. Plaintiffs do not have to pay a structured settlement company to manage future payments. Furthermore, payments are guaranteed since they are provided through an insurance company.
Defendants can also benefit from entering into structured settlements. Doing so lets them avoid lengthy litigation which results in higher legal fees and settlement amounts. Additionally, since annuity payment obligations rest with life insurance companies, defendants know their financial responsibility will be met.
It is critical to work with experienced structured settlement lawyers to ensure all aspects are covered. Attorneys will want to review current and future income needs and develop a plan that provides clients with sufficient cash flow.
Other considerations must be addressed when annuities are provided to minor children or decedent estates. Furthermore, estate plans should be developed to pass along annuities to beneficiaries.
While there are many advantages to structured settlements, individuals should take time to learn as much as possible about the pros and cons. While it's advisable to consult with an experienced lawyer, you can find out more about what is a structured settlement, along with estate planning in our personal finance blog.