Structured Settlements 101: How Structured Settlements Work
You have probably heard the term "Structured Settlement" on a
television or print ad and wondered what it meant. After all,
the term is not a part of our everyday lexicon.
A structured settlement is a contract under which an insurance
company undertakes to make periodic payments to an injured party
as part of a bodily injury claim settlement or to a surviving
family member to whom a large settlement has been awarded. These
are just two examples of where a structured settlement might be
used. Structured settlements have become popular because they
offer substantial benefits to all parties involved in the
settlement agreement.
A brief review of the dictionary reveals the following
definition: a structured settlement is simply a financial
package that permits a settlement to be paid in regular payment
installments for either a set period of time or over a lifetime.
In short, a structured settlement is a package that is tailor
made for the individual or payee by the payer or an interested
third-party. Some structures include immediate payment to cover
any special damages that may have occurred or will occur.
The system of structured settlements was first introduced in
Canada in the early 1970's and spread into the United States
very quickly. Within a few years, the idea had found its way to
many countries including Australia and most member states of the
European Union.
Benefits of a Structured Settlement
A structured settlement annuity provides a payment stream that
is tax-free over a determined period of time. Most investment
options such as stocks and bonds, real estate, savings accounts,
and similar vehicles simply cannot match the flexibility and
security of a Structured Settlement Annuity.
Another benefit of a structured settlement annuity is that it
can be designed so that payments are made over an extended
period of time, even throughout the life of the payee. In the
event of the recipient's death, a guaranteed portion of the
settlement may be paid to the person's estate or to a named
beneficiary. Structured Settlements have become quite common and
offer the additional security of regulation by both Federal and
State statutes. There are also provisions in IRS and
Medicare/Medicaid guidelines which take them into account.
Alternatives to Structured Settlements
It's quite easy to see that a structured settlement can work to
the advantage of all parties in a variety of circumstances.
However, there are occasions when the beneficiary of a
structured settlement would prefer not to have periodic
payments, preferring instead a lump sum payment. Such might be
the case where an individual would like an amount of money to
purchase a home, perhaps to cover large medical bills or to pay
off a mortgage. This option has also proved especially popular
with lottery winners. There are a number of insurance companies
and others that provide this service for a fee. In such
instances the insurance company or another interested
third-party makes the lump sum payment with a charge for
expenses and interest deducted. It is important to consider
these fees and read the fine print carefully to be sure that you
are not signing away the bulk of your payment. How do the
alternatives work?
The settlement contract is sold to a financial institution which
then accepts the periodic payments from the payer and gives the
beneficiary a lump sum. Commonly, the financial institution
involved will be another major insurance company. The insurance
company charges a handling fee which will usually be calculated
to take into account adjustments for interest charges and
handling costs. Again, if you are considering taking this option
you must bear in mind that the company buying the payments for a
cash sum is in business to make money. The amount of the one-off
payment will certainly be considerably less than the gross
amount that would have been received over the original extended
period. Unless the amount of the lump sum is very substantial
and the recipient can be sure of consistent investment income,
it's almost certainly going to be better to stick with the
original arrangements. An exception might be where the recipient
is a younger person in good health with a substantial
expectation of gainful employment for the long term.
Again, as with any contracts be sure to read and understand the
terms of the agreement you are making. Make a list of questions
and ask until you understand. It is also a good idea to cast a
wide net when looking for an alternative to structured
settlements as fees and services; and thus your bottom line can
vary greatly.