Structured Settlement Basics
A structured settlement is a term you’ve probably heard countless times. It’s all over the television in ads from law firms; you can even find it in magazines or other print ads. But since this is a term you don’t use everyday you may not be completely aware of what it means.
To put it incredibly simply a structured settlement is a contract made by an insurance company to pay a large amount to an injured party who has a bodily injury claim settlement or to a surviving family member who has been awarded a settlement. The contract states that the insurance company will make periodic payments until the settlement is completely paid. There are other conditions in which a structured settlement may be used, but these are the two most common. Structured settlements are popular because they offer a great number of benefits to all parties involved.
The dictionary defines a structured settlement in much the same way. Stating that it is a financial package that allows a settlement to be paid in regular intervals over a set period of time. The period of time and the amount paid is tailored to the individual that is getting the settlement. Some structured settlements will include provision for any immediate damages that need to be paid. Structured settlements were first introduced in the early 70’s in Canada. Almost immediately the idea spread to the United States and within a few short years had continued to spread to Australia and much of Europe.
Of the many benefits of a structured settlement one of the biggest is that it’s providing a tax-free source of income for an extended period of time. Other investment options like stocks and bonds, real estate, or high interest bank account simply don’t have that flexibility. You will still be taxed on that income and it is much less reliable.
Another benefit is the flexibility in the length of time a structured settlement can be tailored to. There can be structured settlements to be paid over five years or the rest of recipient’s life. If the recipient dies, it can be provisioned that a certain amount of the settlement will go to a beneficiary. Because of these benefits and others structured settlements are very common and are regulated by Federal and State law. IRS and Medicare guidelines also take them into account. With all this added security its no wonder that structured settlements are so favorable.
While structured settlements do work to the advantage of everyone in a lot of cases, that is not the case with everyone. There are circumstances in which someone will prefer to get their settlement in one lump sum. For example if the beneficiary wants to buy a home or pay off lots of medical bills a series of payments will not be helpful. This option seems popular with lottery winners. Although there are plenty of companies that provide this service, they almost always charge a fee to do so. This fee is usually for expenses or loss of interest and will reduce the amount of your lump sum settlement. Be sure to read all the terms and conditions or you may unwittingly give away a majority of you payment.
The lump sum agreement happens when the settlement contract is sold to a third-party financial institution, usually another insurance company. Once they buy the contact they accept the periodic payments for the settlement and give the whole amount to the beneficiary. So essentially this third party is now receiving the structured settlement.
The insurance company will charge you a fee for this for a variety of things. Usually this will be for interest charges, handling costs or account adjustments. Keep in mind that the company that’s buying the payments is still a business and they are trying to make money. So the amount of the one payment will always be a lot less that what would have been received over the course of a structured settlement.
Unless the settlement amount is extremely large and the beneficiary can be sure of consistent income a structured settlement is probably the best bet. But, for example, if the person is a young individual and in good health a lump sum may be the right choice, they still have a long time to be employed and have other income.
Always be sure to read the terms of the settlement agreement, as with any contract. But more importantly, make sure you understand all the terms of the agreements. Write down your questions and ask anything that comes to your mind. Keep asking until you fully understand what you’re agreeing to. If looking for an alternative to structured settlements, look in a lot of places as the fees and services will vary.
Subscribe to the comments for this post