What Is a Structured Settlement and How Does It Work?

A structured settlement is a financial arrangement that is often established as a result of a legal settlement or a court award. This type of settlement provides periodic payments to a claimant as opposed to a single lump-sum payment. It is commonly used in cases involving personal injury, workers' compensation, or wrongful death. Structured settlements offer several benefits, including financial security and tax advantages, making them a popular choice for long-term financial planning.

Key Features of Structured Settlements

1. Periodic Payments: Unlike traditional lump-sum settlements, structured settlements are disbursed in regular installments over a predetermined period. These payments can be scheduled monthly, annually, or according to any other agreed-upon interval.

2. Customization: The settlement plan can be customized to suit the claimant's needs. For instance, the payment schedule can be designed to increase over time to account for rising costs, or include larger sums for anticipated future expenses like college tuition or medical care.

3. Tax Benefits: One of the significant advantages of structured settlements is the favorable tax treatment. Payments from a structured settlement are generally tax-free for personal injury or wrongful death cases, providing a tax-efficient income stream.

4. Financial Security: By providing a stable and predictable income, structured settlements help ensure long-term financial security for the recipient. This is particularly crucial for individuals who may not have the expertise to manage a large sum of money effectively.

5. Protection Against Dissipation: Structured settlements protect recipients who may be tempted to spend a lump-sum payment quickly. By receiving payments over time, claimants are less likely to exhaust their funds prematurely.

How Structured Settlements Work

1. Settlement Agreement: After a legal claim has been resolved, both parties agree on the terms of the structured settlement. This agreement outlines the amount, duration, frequency, and structure of the payments.

2. Qualified Assignee: The defendant transfers the obligation to make future payments to a qualified assignee, typically a life insurance company. This insulates both the defendant and the claimant from managing the annuity directly.

3. Purchase of Annuity: The qualified assignee purchases an annuity from a life insurance company to fund the settlement payments. An annuity ensures that the agreed-upon payment schedule is met, as it is a financial product designed to provide regular disbursements.

4. Receipt of Payments: The claimant receives payments as outlined in the settlement agreement. These payments can be consistent amounts or may change according to the claimant's expected needs.

5. Adjustments and Modifications: While structured settlements are generally fixed, some flexibility can be incorporated. Life changes such as unforeseen medical needs or changes in financial circumstances may allow for renegotiation or selling of future payment rights, though this can have financial implications.

Considerations and Limitations

• Inflation Protection: Structured settlements do not typically adjust for inflation unless specifically designed to do so. This could affect the real value of the payments over time.

• Lack of Liquidity: Once a structured settlement is in place, accessing a large cash sum is difficult, limiting financial flexibility.

• Irrevocability: Once agreed upon, the terms of a structured settlement are challenging to alter or terminate without incurring penalties or losses.

In conclusion, structured settlements provide a viable option for ensuring financial stability over time, especially for those receiving compensation due to injury or loss. They offer numerous benefits, from tax advantages to long-term security, making them a wise choice for individuals seeking dependable financial support. Nevertheless, it is essential to work with legal and financial professionals to design a structured settlement that best meets the claimant's current and future needs.