When it comes to a personal injury case, wrongful death claim, or medical malpractice lawsuit, the settlement process can be complex and lengthy. One option that may be presented to the injured party or their family is a personal injury settlement, also called a structured settlement.
But what exactly is a structured settlement, and more importantly, are structured settlements permanent?
How Structured Settlements Work?
A structured settlement is a type of financial arrangement where the settlement funds from a personal injury (injured worker), wrongful death, or medical malpractice case are paid out to the injured party or their family in a series of periodic payments over a specified period of time, rather than as a single lump sum payment.
These payments are typically funded through a specialized annuity called a structured settlement annuity, which is purchased by the defendant or their insurance company.
Structured settlements are commonly used in cases involving severe injuries, permanent disabilities, or fatalities, where the injured party or their family requires long-term financial support. They can be customized to meet the specific needs of the injured parties, with payment schedules that can be designed to provide a steady stream of income for years or even decades into the future
Are Structured Settlements Permanent?
One of the most important aspects of structured settlements is their permanence. When a structured settlement is established, the terms of the payments are set in stone, meaning that the injured party or their family will receive a guaranteed income stream for the duration of the settlement period. This can provide a sense of financial security and peace of mind, knowing that the settlement funds will be there to cover ongoing medical expenses, living costs, and other necessary expenditures.
In many cases, structured settlement payments can be designed to last for the lifetime of the injured party, ensuring that they will have the financial support they need for as long as they live. This is particularly important in cases involving permanent disabilities or chronic medical conditions that require ongoing care and treatment.
Advantages of Structured Settlements
There are several advantages to choosing a structured settlement payment over a lump sum.
1. First and foremost, structured settlements offer a guaranteed, tax-free income stream that can provide long-term financial stability to the injured parties and their family.
This is because your structured settlement periodic payment is exempt from federal and state income tax under the Internal Revenue Code.
2. Another advantage of structured settlements is that they can help protect the injury victim from the risks associated with managing a large lump sum of money.
Many people who receive a substantial settlement may be tempted to spend the money quickly or make unwise investments, leaving them without the funds they need to cover future expenses. With a structured settlement, the money is paid out over time, reducing the risk of mismanagement or overspending.
3. Structured settlements can also be customized to meet the specific needs of the recipient.
For example, payments can be scheduled to increase over time to account for inflation, or they can be designed to provide larger payments during years when the recipient anticipates higher expenses, such as when a child is expected to start college.
4. Additionally, structured settlements often offer competitive rates of return compared to other investment options.
This is because the annuities used to fund structured settlements are typically backed by highly rated life insurance companies, which can provide stable, long-term growth.
Disadvantages of Structured Settlements
While structured settlements offer many benefits, there are also some potential drawbacks to consider.
1. One of the main disadvantages is the lack of flexibility once the settlement terms are established. Unlike a lump sum payment, which can be invested or spent as the recipient sees fit, structured settlement payments are fixed and cannot be easily modified.
This lack of flexibility can be problematic if the recipient’s financial needs change unexpectedly over time. For example, if the recipient requires a large sum of money for a medical emergency or other unforeseen expense, they may not be able to access the funds they need from their structured settlement.
2. Another potential disadvantage of structured settlements is the risk of the insurance company that funds the annuity becoming insolvent. While this risk is relatively low, as structured settlement annuities are typically backed by highly rated insurers, it is still a factor to consider.
3. In some cases, receiving a structured settlement may also impact the recipient’s eligibility for certain government benefits, such as Medicaid or Social Security Disability Income (SSDI). This is because the regular payments from a structured settlement may be counted as income, which can disqualify the recipient from these programs.
Should I Choose A Structured Settlement Or A Lump Sum?
When deciding between a structured settlement and a lump sum payment, there are several important factors to consider. These include:
Ultimately, the decision between a structured settlement and a lump sum payment is a personal one that should be made in consultation with a qualified attorney or financial advisor who can help you understand your options and make an informed choice.
Can Structured Settlements Be Changed Later?
However, there are certain scenarios in which the terms or duration of a structured settlement can be altered:
So, while most structured settlement annuities are designed for permanence, options exist to redirect or monetize future payments if needed. An experienced personal injury attorney can advise plaintiffs on their options.
Selling Your Structured Settlement Payments
In recent years, many recipients have sold their future settlement money in exchange for immediate cash. The deals are made with companies called settlement purchasers or factoring companies.
To protect the recipients’ structured settlement payment rights, most states and the Federal Government enacted laws requiring court approval for such transfers. Judges must confirm that the deals are made in the seller’s best interest. However, consumer advocates worry that many sellers do not get fair prices.
There are cases involving why the injured plaintiff might want to sell their future income annuity payments, like:
However, sellers must carefully weigh both the advantages and disadvantages of selling a structured settlement. They lose out on years of steady tax-free income intended to support them.
High fees charged by settlement purchasers also cut into the lump sum received. And if the cash is squandered quickly, the injured person loses their financial safety net.
“Selling your structured settlement payments can provide the immediate cash needed, but it also risks the future fixed payments.”
Impact of the Payee’s Death
Structured settlements are usually customized to address what happens when the original recipient dies. There are three main options:
Consulting an estate planning attorney can help plaintiffs decide the best provisions for their situation. For instance, a lifelong disability may warrant payments continuing to beneficiaries versus ending at death.
Seeking Professional Advice
Given the complexity and long-term nature of structured settlements, it is highly recommended that anyone considering this option seek the advice of a qualified professional. This may include an experienced personal injury attorney, a financial advisor, or a structured settlement specialist.
These professionals can help you understand the pros and cons of structured settlements, assess your individual needs and goals, and determine whether a structured settlement is the right choice. They can also assist with the negotiation process and ensure that the terms of the structured settlement agreement are fair and appropriate.
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