Structured settlements provide a steady stream of tax-free income to a claimant over a specified period or for the remainder of their lives. These settlements are often used in personal injury, wrongful death, workers’ compensation, and medical malpractice cases to compensate the claimants for their losses. Various payout options are available for anyone considering a structured settlement, let’s have a quick look at them!
What is a Structured Settlement?
A structured settlement is a negotiated financial or insurance arrangement through which a claimant agrees to resolve a personal injury tort claim by receiving part or all of a settlement in the form of periodic payments on an agreed schedule rather than as a lump sum. This offers a claimant the opportunity to receive a steady stream of tax-free payments tailored to their needs over a period of time or for their lifetime.
How Does A Structured Settlement Work?
The process of establishing a structured settlement involves several parties, including the claimant, the defendant, their respective attorneys, and a structured settlement broker or consultant. Once a settlement agreement is reached, the defendant’s insurance company typically funds an annuity from a life insurance company, which then makes periodic payments to the claimant according to the agreed-upon terms.
Funding structured settlements requires signing for an annuity contract. An annuity provides a steady stream of payments over a specified period or for the lifetime of the annuitant. In the context of structured settlements, the defendant’s insurer purchases an annuity from a life insurance company, which then assumes the obligation of making periodic payments to the claimant.
Advantages of Structured Settlements
One of the primary benefits of structured settlement payment is that it provides a guaranteed, tax-free income stream for the claimant. This can be particularly advantageous for individuals who have suffered severe injuries and may be unable to work or have ongoing medical expenses. Structured settlement annuities also offer customizable payment options, allowing claimants to customize their payments to meet their specific financial needs.
Another advantage of structured settlement annuity is that it protects claimants from the potential mismanagement of funds. Receiving a large lump-sum payment can be exciting, and some individuals may be tempted to spend the money quickly or make poor investment decisions. By receiving periodic payments, claimants are less likely to exhaust their settlement funds prematurely.
Types of Structured Settlement Payout Options
Income-for-life annuities provide claimants with a guaranteed stream of income for the remainder of their lives. This option is well-suited for individuals who have suffered permanent injuries or have long-term care needs. However, upon the claimant’s death, the payments cease, and any remaining funds are typically retained by the insurance company.
Period certain annuities provide claimants with a steady stream of income for a specified period, such as 10, 15, or 20 years. If the claimant dies before the end of the specified period, the designated beneficiary will continue to receive the payments until the end of the term. However, once the term ends, the payments cease, even if the claimant is still alive.
Joint and survivor annuities provide income for the lifetimes of both the claimant and a designated beneficiary, typically a spouse. Upon the claimant’s death, the beneficiary continues to receive payments for the remainder of their life. This option is suitable for claimants who want to ensure their loved ones are financially protected.
Deferred lump-sum payments allow claimants to receive a portion of their settlement as a lump sum at a specified future date, while still receiving periodic payments in the interim. This option can be useful for claimants who anticipate a significant future expense, such as a child’s college education or a home purchase.
For example, a claimant may choose to receive $2,000 per month for 10 years, with a $100,000 lump-sum payment at the end of the 10-year period. This allows the claimant to have a steady income stream to cover their ongoing expenses while also planning for a significant future financial need.
Step annuities provide claimants with payments that increase by a fixed amount at specified intervals, such as every 5 years. Percentage increase annuities, on the other hand, provide payments that increase by a fixed percentage at specified intervals. These options can help counteract the effects of inflation and ensure that the claimant’s purchasing power remains consistent over time.
For instance, a claimant may receive $3,000 per month, with a 2% annual increase to account for inflation. This means that the claimant’s payments will grow gradually over time, helping to maintain their standard of living in the face of rising costs.
Treasury Funded Structured Settlements (TFSS) are backed by U.S. Treasury securities, which provide a low-risk investment option for claimants. Market based structured settlements, on the other hand, allow claimants to invest a portion of their settlement funds in various financial products, such as mutual funds or exchange-traded funds (ETFs). These options offer the potential for higher returns, but also come with greater risk.
How To Choose A Structured Settlement Payout Option?
When selecting a structured settlement payout option, claimants should consider their current and future financial needs, life expectancy, and health conditions. Factor in potential inflation and cost-of-living adjustments to ensure that the settlement payments maintain their purchasing power over time. Claimants should also consider their beneficiary designations and estate planning goals when choosing a payout option.
For example, a plaintiff with a reduced life expectancy due to their injuries may opt for a higher monthly payment over a shorter period, while a younger claimant with a longer life expectancy may choose a lower monthly payment that lasts for their lifetime.
Case Studies and Examples
To know the potential benefits of structured settlement payout options, let’s consider a few examples:
Example 1:
John, a 35-year-old construction worker, suffers a severe spinal cord injury in a workplace accident. He receives a structured settlement with an income for life annuity, providing him with a guaranteed $5,000 per month for the rest of his life. This ensures that John has a steady income to cover his ongoing medical expenses and living costs.
Example 2:
Sarah, a 45-year-old single mother, loses her husband in a car accident caused by a drunk driver. She receives a structured settlement with a 20-year period certain annuity, providing her with $4,000 per month for the next 20 years. This allows Sarah to support her children and maintain their standard of living until they reach adulthood.
Example 3:
Michael, a 50-year-old executive, is diagnosed with a rare form of cancer due to exposure to toxic chemicals at his workplace. He receives a structured settlement with a deferred lump-sum payment, providing him with $6,000 per month for 15 years, and a $250,000 lump sum settlement at the end of the 15-year period. This allows Michael to cover his ongoing medical treatments and living expenses, while also planning for his family’s future financial security.
Types of Cases That Use Structured Settlements
Personal injury cases, such as car accidents, slip and falls, and product liability claims, often result in structured settlements to compensate claimants for their medical expenses, lost wages, and pain and suffering.
Wrongful death cases, where a family member dies due to another party’s negligence, may also utilize structured settlements to provide ongoing financial support for the deceased’s dependents.
Workers’ compensation cases, which involve injuries or illnesses suffered on the job, frequently use structured settlements to ensure that the injured worker has a steady income while they recover or if they are unable to return to work.
Medical malpractice cases, where a patient is harmed due to a healthcare provider’s negligence, may also employ structured settlements to cover ongoing medical costs and lost income.
The Process of Establishing a Structured Settlement
Negotiating the terms of a structured settlement involves collaboration between the claimant, their attorney, and the defendant’s insurance company. A structured settlement broker or financial professional can help guide the process and ensure that the settlement terms align with the claimant’s best interests.
Once the settlement agreement is finalized, the insurance company purchases an annuity from a life insurance company to fund the periodic payments. The claimant receives a copy of the annuity contract, which outlines the payment terms, beneficiary designations, and any other relevant details.
Tax Implications of Structured Settlements
One of the most significant advantages of structured settlements is their tax-free status under United States tax law. According to the Periodic Payment Settlement Act of 1982, structured settlement payments are exempt from federal, state, and local income taxes, provided they meet certain criteria. This means that claimants can receive their full settlement amount without worrying about tax liabilities.
Internal Revenue Code Section 104(a)(2) specifies that the full amount of the structured settlement payments is tax-free and excludable from the claimant’s gross income, provided that the payments are made on account of personal physical injuries or physical sickness.
However, there are some exceptions to this tax-free status. For example, if an injury victim sells their future payments to a third party in exchange for a lump sum, the proceeds from the sale may be subject to taxes. It’s crucial for claimants to consult with a tax professional to understand the potential tax implications of their specific situation.
Why And How People Sell Structured Settlement Payments?
In some cases, claimants may find themselves in need of a lump sum of cash rather than ongoing periodic payments. This could be due to unexpected medical expenses, a change in financial circumstances, or a desire to make a significant purchase. In such situations, claimants may consider selling their structured settlement payment rights to a third-party factoring company.
Process Of Selling A Structured Settlement
The process of selling structured settlement money involves a court approval (Due to the Structured Settlement Protection Act), where a judge determines whether the sale is in the claimant’s best interest. If approved, the factoring company purchases the rights to the claimant’s future payments in exchange for a lump sum payment. However, claimants should be aware that selling their payments typically results in receiving less than the total value of their settlement, as factoring companies often charge substantial fees and purchase payments at a discount rate due to low present value of the future payments.
Claimants should carefully consider the long-term implications of selling their structured settlement proceeds and to learn alternative options, such as borrowing from family or friends, seeking financial assistance from government programs, or negotiating with creditors, before deciding to sell their payments.
Conclusion On Structured Settlements Payment Structure
Structured settlements offer claimants a variety of payout options to meet their unique financial needs and goals. By understanding the different types of structured payments available, as well as the factors to consider when selecting a payout option, claimants can ensure that their settlement funds provide long-term financial security and stability.
If you’re considering a structured settlement or have questions about your existing settlement, contact Fairfield Funding today for a free consultation. Our experts are dedicated to providing personalized guidance and support to help you clear your confusion.
