Structured settlements are a common way for plaintiffs to receive compensation payouts from a lawsuit settlement. A structured settlement provides payments over time through an annuity funded by the defendant. Understanding how structured settlements work and the benefits they provide can help plaintiffs make the best decisions about their settlement.
What is a Structured Settlement?
A structured settlement is a customized payout solution for plaintiffs who win a lawsuit settlement. With a structured settlement, the plaintiff agrees to receive periodic payments over time rather than a single lump sum payout.
The payments come from an annuity purchased by the defendant or their insurance company. The annuity provides a stream of tax-free income over a set number of years or even the plaintiff’s lifetime. This ensures the plaintiff has income to cover future medical expenses, lost wages, and other costs related to their injury or lawsuit claim.
Structured settlements are commonly used in personal injury and wrongful death lawsuits but may apply in other types of cases as well. They provide an alternative to lump sum settlements that give plaintiffs ongoing financial security.
How Do Structured Settlements Work?
When a plaintiff wins a settlement in a personal injury case, the judge may award a structured settlement. This requires the defendant to purchase an annuity from a life insurance company.
The annuity then provides scheduled payments to the plaintiff according to the terms of the structured settlement. Typically, the payments are structured to provide income until the plaintiff reaches a certain age or for life.
For example, the structured settlement may provide monthly or annual payments over 30 years to replace lost wages until retirement age. Larger lump sum payouts may be scheduled to cover future medical expenses or other large costs.
Once the structured settlement terms are approved by both parties, the defendant assigns the annuity payments to the plaintiff. The plaintiff becomes the owner of the annuity contract and has the right to receive payments per the settlement schedule.
Structured Settlement Payout Options: Lump Sum vs. Long-Term Payouts
Structured settlements allow customization to meet the unique needs of each plaintiff. Some common structured settlement payment options include:
- Monthly or Annual Payments – Regular recurring payments to provide income over time. This helps replace lost wages.
- Lump Sum Payments – Larger scheduled lump sum payouts to cover major expenses. These may be spaced years apart to pay for things like college or a home purchase.
- Lifetime Payments – Guaranteed income for life to provide lasting financial security.
- Inflation-Adjusted Payments – Payments increase by a set percentage each year to keep up with inflation.
- Deferred Payments – Payments scheduled to start at a future date, such as when a child plaintiff reaches adulthood.
The payment schedule and amounts are customized based on factors like the plaintiff’s age, life expectancy, financial needs, and more. This flexibility helps provide income stability tailored to the plaintiff’s unique situation.
The Advantages and Benefits of Structured Settlement Annuities Over Lump Sum Settlements
Structured settlements offer several advantages that make them an attractive option for many plaintiffs:
Tax-Free Income – Structured settlement payments are completely tax-free under federal and state tax law. This increases the real value of payments by 20-40% compared to taxable income.
Avoid Lump Sum Misuse – A large lump sum could be mismanaged or depleted quickly. Structured payments provide a steady stream of income to better support long-term needs.
Customizable Payment Schedules – The payment schedule is tailored to the plaintiff’s specific financial needs and projected expenses.
Guaranteed Income – Plaintiffs can count on guaranteed income for life or a set period of time. This provides financial stability.
Inflation Protection – Payments can be indexed to increase with inflation to maintain buying power.
Age-Based Payments – Payments can be structured around specific ages to meet needs at different life stages.
For these reasons, structured settlements often provide far more financial security than a single lump sum payout. The customized payment schedule helps ensure settlement funds last and provides lifelong support.
Is a Structured Settlement Annuity Right For Your Lawsuit or Personal Injury Settlement Agreement?
Determining if a structured settlement makes sense depends on each plaintiff’s unique situation, needs, and priorities. Here are some key factors to consider:
- Your Financial Goals – Will regular payments or a lump sum better align with your goals? Do you require an income stream or need to fund large future expenses?
- Your Health – If you have ongoing medical needs, guaranteed future payments can help pay these costs. Lifetime payments also provide security if your health worsens.
- Your Age – Younger plaintiffs have longer time horizons to benefit from structured payments. Older plaintiffs may want immediate access to funds.
- Your Family Situation – Consider one-time expenses like college tuition or potential changes like marriage, children, etc.
- Your Spending Habits – Lump sums require discipline to manage wisely. Structured payments provide built-in management.
- Taxes – Weigh the value of tax-free structured payments versus taxable lump sum income.
It’s important to consult an experienced structured settlement advisor or financial planner to assess your situation. They can help determine if structured payments align with your near-term needs and long-term financial plan.
Tips for Maximizing Your Structured Settlement Annuity Payout and Avoiding Pitfalls When Selling a Structured Settlement
Here are some tips to help plaintiffs maximize their structured settlement:
- Review payment options – Consider different payment frequencies, lump-sum amounts, and lifetime income.
- Index payments to inflation – Adjustments of 1-4% annually can help payments keep pace with rising costs.
- Accelerate payments for early expenses – If you have major expenses coming up soon, negotiate larger payouts in the first 5-10 years.
- Include deferred payments – Scheduling payouts to start when you retire, or a child finishes college provides future support.
- Purchase added insurance features – Consider riders for terminal illness benefits or guarantee payments to a beneficiary after your death.
- Understand payment flexibility – Some structured settlements allow adjustments or selling a portion of the remaining payments if needed.
- Work with experienced advisors – Rely on qualified financial and legal experts familiar with structured settlements.
- Negotiate settlement terms – Push for a favorable payment schedule, amounts, and features to maximize value.
With careful planning guided by trusted advisors, plaintiffs can optimize their structured settlement to best support their financial needs now and in the future.
Frequently Asked Questions
Q: What is a structured settlement?
A: A structured settlement is a financial arrangement in which the payment of a sum of money is made to an individual over a period of time, usually through a series of periodic payments. It is often used as a way to provide a lawsuit payout.
Q: How does a structured settlement work?
A: When a person receives a structured settlement, they agree to receive their settlement money in the form of an annuity from an insurance company. Instead of receiving a lump-sum payment, the individual receives regular payments over a specified period of time.
Q: What is an annuity?
A: An annuity is a financial product offered by an insurance company that provides a series of payments to the annuitant. In the context of structured settlements, the annuity is used to provide periodic payments to the individual.
Q: What are the advantages of structured settlements?
A: There are several advantages of structured settlements. First, they provide a steady stream of income over time, which can be beneficial for individuals who need long-term financial stability. Second, structured settlements often have tax advantages, as the periodic payments may be tax-free. Third, structured settlements can be tailored to meet the specific needs of the individual, such as providing for medical bills or lost income.
Q: What is the structured settlement process?
A: The structured settlement process involves several steps. First, the terms of the settlement are agreed upon by the parties involved in the lawsuit. Then, an assignment company is typically used to purchase the structured settlement annuity. Finally, the annuity is set up and the periodic payments are made to the individual.
Q: How is a structured settlement different from a lump-sum payment?
A: In a structured settlement, the individual receives regular payments over time, whereas in a lump-sum payment, the individual receives the entire sum of money upfront. The choice between a structured settlement and a lump-sum payment depends on the individual’s financial needs and goals.
Q: Can I sell my structured settlement?
A: Yes, it is possible to sell your structured settlement. However, selling a structured settlement may require court approval and it is important to work with a reputable buyer. It is recommended to consult with a financial advisor before making any decisions regarding selling a structured settlement.
Q: What are some common terms used in structured settlements?
A: Some common terms used in structured settlements include periodic payment settlement act, payment settlement act of 1982, structured settlement agreement, annuity from an insurance company, lump-sum payment, terms of the settlement, large sum of money, retirement planning, medical bills, money from the settlement, lost income, punitive damages, personal injury lawsuit, and national association of settlement purchasers.
Q: Can I use a structured settlement for retirement planning?
A: Yes, a structured settlement can be used as part of retirement planning. The regular payments received from a structured settlement can provide a source of income during retirement. However, it is important to carefully consider the terms of the structured settlement and consult with a financial advisor to ensure that it aligns with your retirement goals.
Q: What expenses can a structured settlement be used to cover?
A: A structured settlement can be used to cover a variety of expenses, such as medical bills, lost income, and other financial needs. The flexibility of structured settlements allows for customization to meet the specific needs of the individual.
Q: Are there any restrictions on how I can use the money from a structured settlement?
A: Generally, there are no restrictions on how you can use the money from a structured settlement. Once you receive the periodic payments, you have the freedom to use the funds as needed. However, it is always advisable to consult with a financial advisor to make the best use of the settlement proceeds.
Key Takeaways
- Structured settlements provide customized periodic payments to plaintiffs from lawsuit settlements funded by an annuity purchased by the defendant.
- Payments can be structured monthly, annually, in lump sums, for life, with inflation adjustments, etc., to provide income stability.
- Structured settlements offer tax-free income, avoid misuse of lump sums, guaranteed lifetime income, and payments tailored to individual needs.
- Annuities provide scheduled tax-free payments to plaintiffs according to the structured settlement terms agreed by both parties.
- Plaintiffs should weigh factors like age, health, financial goals, and spending habits when deciding if a structured settlement is right for their situation.
- Proper structuring, expert help, and settlement negotiation can help maximize the value plaintiffs receive from a structured settlement.
