Structured settlements provide a customized schedule of periodic payments to injury victims as an alternative to taking a lump sum payout. This payment structure offers significant tax advantages and flexibility to meet individual needs. Understanding the options for configuring structured settlement payments is important for plaintiffs and attorneys seeking fair compensation.
As one of the leading settlement funding companies, Fairfield is your best choice for any structured settlements. Let’s look at the various types of payout options you can get from a structured settlement contract:
Periodic Payments and Their Tax Benefits
The hallmark of structured settlements is replacing a single lump sum payment with a stream of periodic payments tailored to the plaintiff’s projected needs. This stream of income payments is funded by an annuity purchased by the defendant or their liability insurer as part of a settlement agreement.
Unlike lump sum settlements, periodic payments received from a structured settlement annuity are income tax-free under federal law and most states. This favorable tax treatment results in a significantly higher effective value over time compared to a lump sum payout subject to income taxes.
The tax-free status also applies if a plaintiff later decides to sell their future structured settlement payments. The periodic payments themselves, not just the upfront lump sum from selling them, retain their tax-free benefits.
Customization Options for Structured Settlements
One of the key advantages of structured settlements is the ability to customize the payment schedule to address the specific needs of an injury victim. There are several elements that can be tailored:
- Payment frequency: Monthly, quarterly, annually, or other intervals
- Payment start date: Immediate or deferred payments
- Payment duration: Lifetime, guaranteed fixed period, or life contingency with period certain
- Increases: Stepped increases or percentage boosts to offset inflation
- Lump sum payouts: Scheduled future lump sum payments
This flexibility allows structured settlements to provide lifetime assurances for long-term medical care, guaranteed income replacement, upfront cash for major purchases, and funds for future needs like college or retirement.
Configuring Payment Frequency
Structured settlement payments can be scheduled on any time interval that makes sense for the plaintiff’s situation. Common payment frequencies include:
- Monthly: Provides consistent cash flow to cover ongoing everyday expenses. This is one of the most popular options.
- Quarterly: Offers a middle ground between monthly and annual payments. Quarterly installments line up nicely with seasonal expenses.
- Annually: Useful for large predictable annual expenses like property taxes. Annual payments have the highest tax deferral.
- Semiannually: Twice-per-year payments spread cash flow more evenly than a single annual installment.
The payment frequency is set at the time the structured settlement annuity contract is established and cannot be altered later. Monthly or quarterly payments offer more consistent cash flow for meeting basic living expenses or medical costs. Less frequent payments work well for funding large, recurring costs on a preset schedule.
Tailoring the Payment Duration
Plaintiffs have options when setting the duration of structured settlement payments. Common choices include:
- Lifetime payments: The annuity makes payments for the remainder of the plaintiff’s life. This protects against the risk of outliving funds from a lump sum. Payments cease upon the plaintiff’s death.
- Period certain: The annuity pays out over a set number of years. This creates a steady cash flow over a fixed period. Payments stop once the term ends.
- Life with period certain: Payments continue for life or a set minimum period, whichever is longer. This guarantees lifetime income but with a backstop term if the plaintiff has an early death.
- Joint life: Payments last for the joint lifetime of two people, often a married couple. The lifetime payout continues until both annuitants have died.
The duration of payments will depend on factors like the extent of injuries, life expectancy, coverage of future medical costs, and the need to replace lost wages. Permanent health effects or a shorter life expectancy make lifetime or period certain options more appealing.
Scheduling Lump Sum Payments
Many structured settlements incorporate one or more lump sum payouts at set future dates in addition to the ongoing periodic payments. These future lump-sum amounts can be used to fund predictable large expenses like:
- College: A single payment when a child turns 18 to cover 4 years of tuition and expenses.
- Home purchase: A down payment scheduled when someone turns 30 and is ready to buy their first house.
- Medical treatment: A large installment timed for an anticipated major surgery or procedure.
- Retirement: A lump sum at retirement age to supplement other income sources.
- Milestone birthday: A payment at a major birthday like turning 40 or 50.
The flexibility to schedule future lump sums gives structured settlements an extra advantage over taking a single present-day lump sum. The periodic payments cover everyday ongoing needs while the deferred lump sum payouts fund predictable big-ticket future expenditures.
Benefits of Customized Payment Structure!
To sum up, the customized schedule of periodic payments and deferred lump sums in a structured settlement provides a tax-efficient, guaranteed income stream tailored to an individual’s needs over time. This payment structure offers plaintiffs financial security and protects compensation intended to cover a lifetime of medical expenses and income losses resulting from an injury or wrongful death.
What are some different types of structured settlement payment options?
Structured settlement payments may be customized in various ways to meet a client’s settlement planning needs. Common options include lifetime income payments, payments over a fixed period of time, payments that increase by stepped annuity payouts to help offset inflation, and payments with deferred lump sum amounts for future needs.
What is a structured settlement payment stream?
The payment stream refers to the schedule of periodic payments, like monthly or annual annuity payouts, established as part of a structured settlement agreement in 2023. This payment stream is customized to provide an ongoing source of tax-free income to meet the claimant’s financial needs.
What is a joint and survivor-structured settlement?
A joint and survivor structured settlement provides payments over the joint lifetimes of two people, often a married couple. Payments continue until both annuitants die, providing a source of income for the lifetime of the surviving spouse after their partner passes away.
Can I get a structured settlement for a personal injury?
Yes, structured settlements are commonly used in personal injury cases to provide tax-free income and help cover damages related to long-term medical care, loss of income, or other costs stemming from an injury. The customized payments can be structured to pay out over many years.
How do interest rates impact structured settlement payments?
While interest rates at the time of settlement affect the cost to insurance companies of funding the annuity payouts, the structured settlement payments themselves are fixed and guaranteed once the settlement amount is determined. Changes in interest rates do not impact the periodic payment amounts a claimant receives.
Is structured settlement income taxable?
No, structured settlement payments are income tax-free under federal law as long as the settlement stems from a physical injury or sickness. This provides significant tax savings over many years compared to a lump sum payment.
What are structured settlement payments used for?
Typical uses include replacing lost income, covering medical expenses, providing for a child’s future education, or building retirement savings. The payments provide an ongoing source of funds for current and future needs.
Who is the beneficiary of a structured settlement?
The injured claimant receiving the settlement payments is generally considered the beneficiary. In some cases, a spouse or other dependent may also be a stipulated beneficiary to receive a certain number of payments if the primary beneficiary dies.
If I am Interested in selling my structured settlements, What’s the Process of selling?
You may be able to sell your future structured settlement payments but very sharp discounts often apply and most sales require court approval. Any sale also results in a loss of the tax advantages on the remaining payments sold.
Why are settlement details fixed at the time of settlement?
To provide the guaranteed structured settlement payment stream, the annuity contract must be finalized at the time of settlement, fixing details like payment amounts, duration, increases, and the beneficiary. This locks in the future payment schedule.
What is a period of certain structured settlement?
It provides scheduled payments over a fixed period of time, such as 5 or 10 years, rather than guaranteeing payments for the claimant’s lifetime. The payment duration is stipulated for a set number of years.
Can life insurance companies fund structured settlement payments?
Yes, the annuities that fund structured settlement payment streams are commonly purchased from life insurance companies. The annuity contract provides guaranteed periodic payments.
Can I get a structured settlement for a medical malpractice injury?
Yes, structured settlements are commonly used in resolving medical malpractice lawsuits. The payments can be customized to cover increased healthcare costs, loss of income, and other damages related to the malpractice injury.
How does my lawyer distribute structured settlement payments?
Your lawyer works with you to structure the settlement payments in a way that meets your needs. This includes customizing details like the payment frequency, duration such as lifetime or a certain period, amounts, and timing of any lump sum payouts from the proceeds.
Why are structured settlement payments flexible?
Payments can be customized in many ways, like receiving lifetime income, getting a temporary life annuity with reduced payments later, or including decreases or fixed percentage steps up in the amounts over time. This flexibility helps tailor the settlement income stream to an individual’s unique needs.
Bara is a seasoned expert in the structured settlement and annuity field, with a successful career in structured settlement factoring. Her experience spans prominent companies such as J.G. Wentworth, Peachtree Settlement Funding, and Liberty Settlement Funding, where she managed substantial marketing campaigns. Constantly updating her knowledge, Bara is committed to providing exceptional experiences and maintaining her position as a trusted professional in the industry.