Structured Settlements
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What is Structured Settlement?
A structured settlement is a negotiated contract in which an injured party agrees to settle a personal injury claim by receiving a portion or all of a payout in the form of a lump sum or a series of payments over a period of time. It is a form of financial compensation awarded to individuals who have experienced a physical, psychological, or personal injury due to the negligence of another party. The neglecters/the ones at fault either pay a lump sum amount or in continuous periods (Structured settlement annuities).
In other words, structured settlements are typically paid out over time, as opposed to a lump sum payment. When the settlement is drafted, the claimant decides how often and when to receive periodic payments.
However, in some cases, the recipient may need immediate lump sum cash to fulfill his current financial requirements, like buying an asset, a house or investing somewhere to get better returns. Here, selling these settlements can be the most suitable option to opt for.
History in the U.S.
The idea behind structured settlements dates back to the 1960s when Canadian courts were faced with thousands of lawsuits against pharmaceutical companies that had produced thalidomide, a medication that caused birth defects. In these cases, it became clear that traditional lump-sum payouts were not sufficient because many victims required ongoing medical care and support throughout their lives. Instead, lawyers began advocating for structured settlements that would provide regular payments over an extended time.
The concept quickly gained traction in the United States as well. In 1979, the IRS issued Revenue Ruling 79-220, which provided tax benefits for recipients of structured settlement payments. This ruling allowed injured parties to exclude settlement payments from their gross income and avoid paying taxes on them.
The Periodic Payment Settlement Act
Despite this initial progress, there was still some uncertainty around whether state governments could also tax structured settlement income from personal injury cases. To address this issue, Congress passed the Periodic Payment Settlement Act (PPSA) in 1982.
This federal law clarified that both state and federal governments could not tax any portion of damages received through a qualified structured settlement annuity or trust established as part of a physical injury case or workers’ compensation claim. With these protections in place, more people began choosing structured settlements as an alternative to lump-sum payouts.
By 1985, industry leaders formed the National Structured Settlement Trade Association (NSSTA) to promote education about and advocacy for this payment method among plaintiffs’ attorneys and other stakeholders involved in personal injury litigation. Today, millions of Americans benefit from receiving guaranteed regular payments through these types of settlements settled after a personal injury case.
Purpose Of Structured Settlement Annuities
The concept of structured settlement annuity emerged from a need to protect claimants from spending their entire compensation too quickly, leaving them without sufficient funds for future expenses.
By receiving tax-free payments, recipients can maintain a steady income stream that helps cover living costs, medical bills, and other necessary expenditures.
Tax benefits
One significant advantage is that the payments are generally exempt from federal and state taxes under the U.S. Internal Revenue Code Section 104(a)(2).
Predictable Income
Recipients know precisely how much money they will receive at each payment schedule/interval which allows them to budget effectively.
Credit protection
In most cases, creditors cannot seize these annuity payments, thus providing some level of financial security against debt collectors.
Different Types of Cases
A structured settlement is often used in personal injury cases, but there are other types of cases that can result in this type of settlement.
1. Medical Malpractice Cases
In medical malpractice cases, patients may suffer from injuries due to negligence by healthcare professionals. These injuries can be life-changing and may require ongoing care and treatment, which can lead to high medical bills. A structured settlement provides regular payments to cover these expenses over time.
2. Product Liability Cases
If someone suffers an injury because of a defective product, they may file a lawsuit against the manufacturer or distributor responsible for producing or selling it. In such situations, the injured party could receive compensation through regular payments made via structured settlements.
3. Workers’ Compensation Claims
An employee who gets hurt while on duty at work might be entitled to workers’ compensation benefits under state law. This includes lost wages and coverage for medical expenses related to workplace injury claims that are typically settled using structured settlements.
4. Wrongful Death Lawsuits
If someone dies as a result of another person’s actions (or lack thereof), the beneficiary or surviving family members might file wrongful death lawsuits seeking damages from those responsible parties involved with periodic payments made via structured settlements covering funeral costs and lost income, among other things needed by them after losing loved ones prematurely.
5. Personal Injury Lawsuits
- Cases like slip-and-fall accidents,
- dental malpractice,
- nursing home abuse,
- defective products,
- and car accidents.
The Process of Receiving
When a person files a personal injury claim, the liable party’s insurance company often becomes involved. The insurance company will review the claim, negotiate a settlement, and compensate the affected party.
The settlement amount depends on the severity of the injuries, medical bills, lost wages, and insurance policy limits. Insurance companies strive to resolve claims in such a way that minimizes their financial liability.
If you’re awarded this type of settlement after winning your case, here’s what you can expect:
- You’ll work with your attorney and/or financial advisor to determine how much money you need upfront versus how much should be allocated towards future periodic payments through an annuity product.
- Your attorney will negotiate with the defendant’s insurance company regarding payment terms and the structure of the annuity.
- Once an agreement is reached, a third-party assignment company will collect funds from the defendant and purchase an annuity from a life insurance company to fund your periodic payments.
- You’ll begin receiving regular payments according to the terms outlined in your settlement agreement. These payments can be monthly, quarterly, or annually depending on what was agreed upon during negotiations.
Payment Structure Flexibility
They offer a wide range of payment options, allowing plaintiffs to customize their settlement plans according to their unique financial needs and goals.
This flexibility ensures that individuals receive the necessary funds in a manner that best suits their situation, whether it be through monthly installments, annual payouts, or even lifetime disbursements.
➡ Monthly Installment Plans
One popular option for these types of payments is monthly installments. These regular payments provide a steady income stream for plaintiffs who may have limited earning potential due to injury or disability. Monthly installment plans can also help cover ongoing medical expenses and other essential living costs without the risk of depleting the lump sum too quickly.
➡ Annual Payout Arrangements
In some cases, receiving an annual payout may be more beneficial than monthly installments. Annual payouts allow recipients to manage larger sums of money at once, which can be advantageous when planning significant purchases or investments throughout the year. Additionally, this arrangement might better align with certain tax strategies depending on individual circumstances.
➡ Lifetime Disbursement Possibilities
A third option available within structured settlements is lifetime disbursements – these guarantee regular payments for as long as the recipient lives. This approach offers peace of mind knowing that one’s financial security will not run out during their lifetime while also providing protection against inflation by adjusting payment amounts over time based on predetermined factors such as cost-of-living increases.
The Right to Sell Your Payments
Coming to the main question, what if you, as a structured settlement recipient, need access to more cash upfront? For example:
- You want to buy a house or make another significant purchase;
- You’re facing unexpected medical bills;
- Your business requires additional capital;
- You’ve lost your job and need money now; etc.
If any of these situations apply to you, selling some or all future payments could be an option worth considering, and you have the full right to do it.
When done correctly with reputable companies like Fairfield Funding, which specializes in buying annuity payment streams at fair prices, clients can achieve their goals without sacrificing too much value from their investment portfolios.
The sale of these structured settlements is also known as factoring transactions.
❌ Factoring Transaction Risks
The primary risk associated with factoring transactions is that sellers may receive a significantly lower lump-sum payment than the total value of their original structured settlement annuities. High discount rates and fees charged by some factoring companies can lead to substantial losses for individuals who choose this option without fully understanding its implications. Additionally, court closures due to unforeseen circumstances such as natural disasters or pandemics can delay approval processes and leave sellers vulnerable during these waiting periods.
✅ The Structured Settlement Protection Act
The Structured Settlement Protection Act is a federal law designed to protect individuals who choose to sell their settlements. This legislation requires court approval before any sale can take place, ensuring that sellers understand what they’re agreeing to and aren’t being taken advantage of by unscrupulous buyers.
Role of the Structured Settlement Protection Act
Disclosure requirements: SSPAs mandate that factoring companies provide clear information about the terms and conditions of their offers, including disclosure statements detailing applicable fees and charges.
Court approval: To ensure transparency and fairness in these transactions, most states require judicial review before any changes are made to an existing structured settlement agreement.
This process helps protect recipients from predatory practices while preserving their right to make informed decisions about managing their finances.
Punitive damages: In cases where it’s determined that a factoring company has violated provisions outlined within an SSPA, courts may impose punitive damages as a deterrent against future misconduct.
Pre-settlement Funding Opportunities
In some cases, plaintiffs may face financial hardships while waiting for their payments to begin. In such situations, exploring pre-settlement funding options can provide temporary relief by offering access to a portion of the anticipated funds before finalizing an agreement.
These loans are typically repaid once the plaintiff receives their periodic payments or a one-time lump sum payment from the settlement amount.
❌ Beware
Pre-settlement funding should be considered carefully due to potentially high-interest rates and fees associated with these loans.
💯 Court Closures
In some cases, court closures may delay the approval of this type of an agreement. Pre-settlement funding can help bridge this gap and provide financial support during these uncertain times.
✅ Consult an Expert
Always consult with a specialized advisor before pursuing pre-settlement funding to ensure you understand all potential risks and benefits involved in this process.
FAQs
Are Structured Settlements a Good Idea?
Structured settlements can be an excellent choice for those seeking long-term financial security, as they provide regular tax-free payments over time. They are particularly beneficial for individuals with ongoing medical expenses or disabilities. However, personal circumstances and financial goals should be considered before opting for a structured settlement.
What is the Downside of Structured Settlements?
The main downside is their lack of liquidity. Once agreed upon, it’s challenging to access funds beyond scheduled payments without selling future payments at a discount through factoring transactions. Additionally, inflation may reduce the real value of fixed annuity payments over time.
What is the Purpose of a Structured Settlement?
They serve to provide long-term financial stability and support to plaintiffs who have received compensation from legal cases involving personal injury or wrongful death claims. The periodic payment structure helps manage living expenses, medical costs, and other needs while minimizing potential risks associated with lump-sum payouts.
What Percentage Do Structured Settlement Companies Take?
When selling future annuity payments through factoring transactions, fees typically range between 9% and 18%. Factors influencing these fees include market rates, transaction size, duration until each payment due date (source), and state regulations governing such transactions.
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About Author
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.