Structured Settlement and Insurance Settlement FAQ

Questions and Answers about Structured Settlement

What is a Structured Settlement?
Structured settlements are an innovative method of compensating injury victims. Encouraged by the U.S. Congress since 1982, a structured settlement is a completely voluntary agreement between the injury victim and the defendant.

Under a structured settlement, an injury victim doesn't receive compensation for his or her injuries in one lump sum. Rather, he will receive a stream of tax-free payments tailored to meet future medical expenses and basic living needs.

A structured settlement may be agreed to privately (for example, in a pre-trial settlement) or it may be required by a court order, which often happens in judgments involving minors.

A structured settlement is an alternative to a lump sum cash payment litigants receive after a personal injury, wrongful death, or workers' compensation case has settled.

In general, the settlement consists of an up front cash payment to provide for immediate needs and a series of future periodic payments, funded by the litigant's purchase of an annuity policy or who then makes the periodic payments directly to the litigant. An annuity policy is a policy allowing someone to put in a large investment and have it paid out over time, that way it is tax-deferred. In general, annuities are packaged as insurance products.

Why Were Structured Settlements Created?

Historically, damages paid because of an injury lawsuit came in the form of a single lump sum. This kind of payment, especially in catastrophic injury cases, often placed the injury victim (or family) in a difficult financial position: With the victim focused on adapting to a new lifestyle, there often was not the time to manage large sums of money.

That can lead to serious trouble. A person who loses funds intended to cover a lifetime of medical care runs the risk of losing medical care and independence. They also risk winding up on public assistance

That's why, in 1982, a bipartisan coalition of legislators in Congress came together to pass legislation that amended the federal tax code. Their action, The Periodic Payment Settlement Act of 1982 (Public Law 97-473), formally recognized and encouraged the use of structured settlements in physical injury cases.

Who Determines The Amount Of Payments And The Payment Schedule?

In any physical injury case, the plaintiff and defendant negotiate issues such as the victim's medical care and basic living and family needs. Oftentimes, one side (or both) will bring in an expert, such as a structured settlement broker, who provides calculations on the long-term cost of these needs.

When there is agreement on the benefits due to the injury victim (which can happen before, during or after a lawsuit), the defendant will agree to fund a stream of payments that meet these needs. The defendant then assigns this obligation to an experienced third party, such as life insurance company, that funds the damage payments with an annuity.

An annuity has been the preferred way of funding because of its pricing and flexibility. An alternative is a trust fund which invests only in United States Treasuries.

As these issues involve complex calculations, you should always consult your attorney and a structured settlement professional.

Are Structured Settlements More Likely To Be Used In Certain Types Of Cases?

Structured settlements can be ideally suited for many types of cases, including:

Persons with temporary or permanent disabilities;
Guardianship cases that may involve minors or persons found to be incompetent;
Workers compensation cases;
Wrongful death cases where the surviving spouse and/or children need monthly or annual income; and
Severe injury, especially with long-term needs for medical care, living expenses and support of family.

Independent surveys show that the more serious the injury, the greater the likelihood that a structured settlement will be used.

What Are The Benefits Of A Structured Settlement Over A Lump-Sum Payment?

A long-term structured settlement has several advantages. First, there is security. A structured settlement provides guaranteed long-term income. That is often invaluable, as it gives the victim (or the victim's family) the ability to adapt and/or recuperate without spending time and resources determining investment strategies.

A second benefit is financial: When Congress amended the federal tax code to encourage structured settlements, it explicitly provided that 100 percent of every structured settlement payment would be exempt from federal and state income taxes.

What Kind Of Flexibility Do I Have In Setting Up A Structured Settlement?

Structures are exceptionally flexible and can be designed for virtually any set of needs. A relatively simple payment schedule can be set up that provides for equal payments at set intervals - for example, every month for 20 years.

Yet payments need not be in equal amounts. Someone who will need a new wheelchair every three years might elect to receive a larger payment every 36 months to help defray the cost. (This would presumably be in addition to the regular payments.)

Structured settlement's inherent flexibility means that they are well-suited to compensate people for a wide variety injuries. Your attorney or a structured settlement broker will be able to explain additional details as they apply to your case.

Am I paying too much for insurance?
Free Instant Quote

Why Take Out a Structured Settlement?

Typically, a structured settlement is ideal for people who would prefer the money over a period of time, for such things as continued medical expenses, replacing future income, or where the person asking for a structured settlement is a minor or otherwise doesn't manage money well.

With a structured settlement, the person taking it out also will ultimately receive a larger payment. Better yet, the person gets guaranteed payments over a long period of time. And, again, the IRS makes it so that these periodic payments are tax free.

How much insurance coverage can I get?
Free Instant Quote

Why Should a Defendant Take out a Structured Settlement?

Usually, it is the defendant or the defendant's insurer who takes out the annuity policy, which is why the settlement is tax free - it is the defendant who owns it. A defendant will take out the annuity policy for a several reasons, high on the list is that the defendant will be able to resolve the case quicker, avoiding the added expense of litigation.

Attorney and professionals encourage the use of a structured settlement for both the plaintiff and the defendant because a structured settlement meets a plaintiff's needs for security, as well as providing more benefits over time.

Most importantly, in most cases, people who receive one-time lump sum payments spend most of it within a five year period. In cases where the plaintiff is unable to work due to injury, the plaintiff could be left in a dire position if the lump sum is spent.

What Should I Know Before I Make My Structured Settlement Payments?

It is important that you seek the advice of a trusted attorney. If you do not have an attorney, you may wish to call the attorney who originally negotiated your case. If you cannot reach that person, you might also consider contacting the office of your state's attorney general.

In recent years, more than 35 states and the federal government have enacted consumer protection statutes that establish strict conditions for these transactions. Under the federal law, court oversight and approval is required for injury victims who chose to sell payments from a structured settlement to a third-party company.

Also, advocates for consumers and the disabled have publicly called attention to the practices of firms engaged in the purchase of structured settlement payments. These groups include the Consumer Federation of America, The National Spinal Cord Injury Association and the National Organization on Disability.

What Are Some Of The Federal Tax Rules That's Beneficial?

In The Periodic Payment Settlement Act of 1982 (P.L. No. 97-473), Congress adopted specific tax rules to encourage the use of structured settlements to resolve physical injury cases.

Section 104(a)(2) of the Internal Revenue Code clarifies that the full amount of the structured settlement payments is tax-free to the victim. (By contrast, the investment earnings on a lump sum payment are usually fully taxable.)

What Is A "Qualified Assignment"?

The defendant or its insurer may transfer the obligation to make future payments through a "qualified assignment" to a financially secure and experienced institution - a life insurance company, for example. The assignment provides the injury victim with strong financial security, and the defendant can close its books on the case.

This process relieves the defendant of further responsibility for the payments and transfers the administration and record-keeping responsibilities. The assignment company specializes in these activities and may offer additional financial security to the claimant.

What Other Federal Tax Rules Govern The Use Of Structured Settlements?

In order to protect the public, Congress specified in Section 130 the requirements to establish a qualified assignment:

The assignee assumes the liability from the defendant;
Both the victim (and his/her attorney) and the defendant agree that the payment schedule cannot be "accelerated, deferred, increased or decreased";
The payment stream may be excluded from the recipient`s gross income for tax purposes;
The injury must be a physical sickness or injury; and
A highly secure funding asset (such as an annuity or U.S. Government obligation) must be used to fund the payments.

Insurance settlements often include payment schedules on a yearly, monthly or periodic structured interval. Insurance settlements make payments as part of the final insurance settlement contract. These structured insurance settlements sometimes paid out in large cash settlement amounts or distributed in large sums typically over a number of years and sometimes for the life span of the client.

Sometimes there are circumstances that happen in life or arise for individuals who are receiving a structured insurance settlement that put them in a position to consider selling or enabling an insurance settlement buyout of a portion of their scheduled payments in exchange for a lump sum of cash upfront. Moreover, be forewarned there tends to be a fee involved in any transaction of this type. Researching and exploring for the best deals available will definitely prove beneficial to the individual who is selling their insurance settlement. Big picture wise, don't rush, be sure to do your homework before selling a structured settlement and find out what the best terms and options available are from a buyer of structured settlements.

Central Insurance Trust offers structured settlement information that is focused on providing the best unbiased knowledge of the industry to individuals like you who wish to learn more about and who seek unbiased information on their insurance settlement.

Selling your Structured Settlement?

We work with several settlement buyers to find the right one for you, your specific circumstances, and at a price that won't insult your intelligence.

If you would like a quote, please fill out the short form found here for more information.

--------------------

Structured Settlement FAQ

What if I misplace or lose the paperwork on my settlement? Normally, if you have misplaced your paperwork, a copy can be obtained from a variety of sources. Contact the company that is responsible for administering your payments, your attorney, the company that settled your case, or the broker that assisted you with the structured settlement during the settlement.

What if my check doesn’t arrive when it is supposed to? Companies will usually ask you to wait a few days beyond the due date to account for occasional slow mail delivery. It will then stop payment and reissue a check. Exceptions can be made, but reasonable period of time usually is required before the company reissues a check. EFT (electronic fund deposits) or direct deposits help avoid lost or late checks. Ask your payment provider if EFT is available.

Can I use my benefits as collateral for a loan? Normally, you may not use your benefits as collateral for a loan. The reason is that the federal law designed to provide these benefits to you on a tax-free basis also prohibits you from assigning or encumbering them.

Can I restructure my payments into a lump sum? Again, the federal law that assures the payments you receive are on a tax-free basis, also prohibits converting your payments into a lump sum.

How do I change my beneficiary? You may request a change providing the terms of your settlement or the payment provider do not prohibit such a request. The request should be made in writing. In some situations the original beneficiary or contingent payee may need to sign off on a change before it is made.

Can I add my spouse’s name (or someone else’s name) to my benefit check? No one except the individuals specified in the Settlement Agreement can be made the payees on your checks. Exceptions may be made as the result of a court order.

Do I earn interest on these payments? The interest is built in to your benefit payments. It is not itemized separately but is already added into the benefit you are receiving. Remember, your are receiving these benefits tax-free. In contrast, interest earned outside of your structured settlement normally is subject to taxation.

Structured Settlement Benefits Comparison

This chart shows the tremendous advantages of a structured settlement over a one-time payout.

Compare the returns on two hypothetical $100,000 settlements. One is invested in conventional taxable investments at an interest rate of 6 percent. The other flows through a structured settlement earning the same rate.

After 20 years, the total net income generated by the lump sum settlement is $158,991. By contrast, the total net payout generated by the structured settlement is $213,994 - a 35 percent increase.