Legal language aside, structured settlements are simple. In a civil case, someone is either forced or agrees to pay someone else money to right a wrong. Instead just writing a check, the at-fault person outs the money towards an annuity from a life insurance company. In that annuity contract are details on the series payments the person who was wronged will receive from the life insurance company.
By structuring the money over a longer period of time, a structured settlement offers a better future guarantee of money than a single payout which can be spent quickly.
The process is around 40 years old. In the 1970s, the courts ruled that a medication called Thalidomide given to pregnant women was responsible for serious, lifelong birth defects, structured settlements emerged as a way to make sure the money awarded to the child lasted a lifetime.
Still, today, most settlements from civil cases are lump sums. There are two key differences between lump sum settlements and structured settlements: long term security and taxes. By structuring the money over a longer period of time, a structured settlement offers a better future guarantee of money than a single payout which can be spent quickly. Money you receive from a personal injury is almost always tax free when you receive it. However, once the money is yours, you’re liable for taxes and dividends from the lump sum.
A personal injury case is a civil case where someone who’s been harmed files a lawsuit seeking money from the person believed responsible for the harm. Money in the form of a structured settlement helps recipient pay for medical expenses or other costs.
A structured settlement is also a common way to compensate the family of someone whose death was the subject of a wrongful death claim. Families may be entitled to receive a stream of tax free payments, to replace the loss of income previously earned by the lost loved one.
Most people know about workers compensation, which pays out workers who get injured on the job while they recover. Payments can be used for medical treatment and wage replacement during periods when injured employees are unable to work and other expenses.
- Structured settlement payments are tax-free.
- In the event of the recipient’s premature death, the contract’s designated heir can continue to receive any future guaranteed tax-free payments.
- Payments can be scheduled for almost any length of time and can begin immediately or be deferred for as many years as requested. They can include future lump-sum payouts or benefit increases.
- Spreading out payments over time can reduce the temptation to make large, extravagant purchases and guarantees future income. This is especially helpful if the recipient has a medical condition that will require long term care.
- Unlike stocks, bonds and mutual funds, structured settlements are not dependent on fluctuations of financial markets. Payments are guaranteed by the insurance company that issued the annuity.
- A structured settlement often yields, in total, more than a lump-sum payout would because of the interest your annuity may earn over time.
- Once terms are finalized, there’s little you can do to alter them if they do not meet your needs. You cannot renegotiate the terms if your financial situation or the overall economy changes.
- Funds are not immediately accessible in case of an emergency, and recipient cannot invest the lump-sum payout in other investments that carry higher rates of return.
- Tapping into your structured settlement without selling payments will cost you money. You will pay surrender charges and IRS penalties if you withdraw funds before age 59½.
- Some parts of a settlement, such as attorney’s fees and punitive damages can be taxed.
- Not all states require insurance companies to disclose their costs to establish a structured settlement or lump-sum annuity. Without this information, a recipient could lose a significant amount of money from their settlement through administrative fees.