Fri. Jun 2nd, 2023

structured settlement how does it work

How Does a Structured Settlement Work?

A structured settlement is a financial solution for settling lawsuits that offer a plaintiff regular, tax-free income. However, this type of settlement can have long-term consequences for the plaintiff and his or her family.

Before accepting a structured settlement, accident victims should consider both the pros and cons. A qualified personal injury attorney can help them make the right decision for their situation.

Periodic Payments

Structured settlements work like this: The plaintiff and defendant in a case agree to a set of terms to pay periodic payments. These are designed to meet the specific needs of the recipient, whether it’s for future medical expenses or a supplement to a retirement fund. The settlement can be structured to provide a stream of reliable income, regardless of the economy or financial markets.

The benefits of receiving periodic payments from a structured settlement are numerous. It can be an ideal way to ensure future income for an injured person, as well as a means of paying off debts, taxes and other expenses.

Unlike lump-sum legal settlements, where payments are given out all at once or in a large number of small amounts, periodic payment structures allow plaintiffs to receive regular and secure compensation in a series of structured annuity payments. These annuities can earn interest and are tax-free for the benefit of the recipient and their designated beneficiaries.

Congress endorsed structured settlements in the 1980s, enacting the Periodic Payment Settlement Act and providing federal protection for injury claimants. The National Structured Settlements Trade Association says that the Act was a bipartisan response to an increasing number of cases where claimants were spending their lump-sum awards in a short amount of time, leaving them with little or no source of income after the settlement.

While many plaintiffs choose to accept a structured settlement, there is one drawback to this option. Generally, settlement funds cannot be accessed for large sums of money without court approval. This can make it difficult to take advantage of the opportunity to purchase annuities with higher returns than the settlement money itself.

There are also other ways that annuity owners can gain more access to their settlements, such as selling some or all of their payments. These sales can be made through a process called factoring.

Factoring companies buy structured settlements from their original recipients, then sell them to new purchasers. They usually charge a discount rate, which is determined by a company’s expectation of the future value of payments. The discounted present value of an annuity is then used to determine the amount that a buyer will offer to purchase it. This can be a great option for annuity owners who want to sell some or all of their payments but still maintain the security of their structured settlement.

See also  The Structured Settlement Act

Guaranteed Payments

Whether your case involves a wrongful death or worker’s compensation claim, guaranteed payments can be an invaluable tool to help you manage financial risk. They are a stream of tax-free, income-generating payment that can provide long-term financial security for you and your family.

Guaranteed payments are designed to provide a lifelong source of income, and they can be customized to fit your needs. They can include scheduled lump-sum payouts or benefit increases in anticipation of future expenses. They can also be set aside to cover medical costs, attorney fees or to fund a trust.

These guaranteed payments are usually paid through a structured settlement annuity contract, which is purchased by a qualified assignee from an insurance company. The contract will specify how much, when and how often the payments will be made.

Many plaintiffs will need money for bills and other expenses prior to receiving their settlement, so this option is useful. They can also choose to sell part of their structured settlement and receive a lump sum payment. This can be helpful when you have a large amount of debt that you need to pay off before the first structured settlement payment comes in.

Congress has encouraged the use of structured settlements through a variety of laws. For example, the Periodic Payment Settlement Act of 1982 states that the first $600,000 in payments from a structured settlement is tax-free, while the next $12,000 or more is exempt from income taxes.

Structured settlements are also beneficial for settling lawsuits that involve high-cost items, such as expensive cars or home improvements. Because they are paid out in regular intervals over a longer period of time, these payments can be more affordable than lump-sum settlements.

In addition, structured settlements do not fluctuate with market changes like stocks and bonds. This means that they are an excellent asset to have in your retirement planning strategy, since you can be sure of the size of your payments.

Selling your structured settlement can be a convenient way to get cash now, but it is not without its risks. It can also be a costly process. It is important to calculate the value of your remaining payments and the discount rate before deciding to sell.

See also  What is an Example of a Structured Settlement?

Tax-Free Payments

Tax-free payments are a major benefit of structured settlement. The Periodic Payment Settlement Act of 1982 bars the IRS and state governments from taxing most payments made to individuals who receive structured settlements for injuries and workers’ compensation cases.

The law also prevents the government from reclassifying lawsuit damages as ordinary income. This is important for victims of personal injury or wrongful death. It prevents them from gaining a higher one-time award that would push up their taxes into their highest marginal income brackets.

Moreover, tax-free payments help people get the money they need without relying on public assistance. This is a key reason that many governments do not tax settlement funds.

For example, if a claimant needs to pay off their mortgage or buy a new car, they may choose a structured settlement that provides a large initial payment followed by smaller, more flexible payments. These will give them the freedom to pay their bills and meet immediate financial needs.

A structured settlement can also be designed to provide additional amounts for extraordinary expenses like college tuition. This is a great way to preserve a plaintiff’s one-time award and help them avoid paying taxes on wages that may be earned after the settlement is completed.

In some states, a structure can be designed to increase the amount of cash paid each year using cost-of-living adjustments (COLA). This could add up to additional income that can be used for a plaintiff’s everyday living expenses or big-ticket purchases.

While a structured settlement is often designed to provide a lifetime income, it’s not uncommon for victims of personal injury to need a lump sum to cover their immediate financial needs. Fortunately, there are a number of companies that specialize in buying structured settlement payments.

However, some of these companies reportedly use misleading advertising and high-pressure tactics to convince financially unsophisticated victims to sell their structured settlements for a low lump sum. This is a practice known as “factoring.”

If you’re considering selling part or all of your structured settlement, it’s crucial to be familiar with state laws. These will help protect you from unreliable buyers. It’s also a good idea to speak with a tax professional before selling your annuity payments.

Flexible Payments

Flexible payments are a way to help your customers spread the cost of products and services they purchase over time. These types of payment options can be a great way to break down barriers to larger purchases, increase customer loyalty, and improve revenue overall.

See also  What to Expect From Early Withdrawal From a Structured Settlement

The benefits of flexible payments are many and varied, but the most important is that they allow your customers to spread the cost of their purchase over a period of time that’s convenient for them. This is especially true for products and services that are expensive, such as clothing or electronics.

While a lump sum may be an attractive option for some people, it’s often not the right fit for others. For example, if you’re suddenly in the market for a home, it’s likely that your finances will need to be adjusted.

This is where structured settlement comes in. Structured settlements provide periodic payments that are designed to cover the expected needs of injury victims over a period of time.

They can be set up for as little or as long as the plaintiff and defendant agree on. They can also be restructured to address the specific financial goals of the plaintiff.

For example, a plaintiff may want to fund college, buy a car, or pay down debt. The plaintiff and defendant work with a qualified assignee to design a structured settlement to meet those needs.

Once the structured settlement is designed, it’s transferred to a qualified annuity company. These companies purchase the annuities from life insurance companies and then begin making payments to the contract owner. As long as the payments received equal the premiums paid, the annuity company will continue to make payments. If the recipient dies before the sum of the payments reaches the premiums paid, then the annuity company will pay the remainder of the payments to the contract owner in a lump sum.

Jeffrey Augers
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By Jeffrey Augers

Jeffrey Augers is a highly skilled and experienced financial analyst with over 12 years of experience in the finance industry. He has a proven track record of delivering exceptional financial insights and recommendations to clients, empowering them to make informed decisions and achieve their financial goals. Jeffrey holds a Bachelor's degree in Finance from the University of Michigan, and an MBA from the Wharton School of Business.