What is structured settlement?
A structured settlement is a negotiated insurance or financial agreement. It is between a plaintiff (the claimant) and the defendant (fault party). The claimant resolves a personal injury tort claim by receiving a settlement. As a result, the fault party agrees to fund a structured settlement. The plaintiff will receive periodic payout forming an income stream. As part of the negotiations, both parties agree on a structured settlement and set the periodic payments.
A structured settlement plan on an agreed schedule is better than a lump sum payment. It is to the welfare of both parties that the amount is in a structured settlement. On the one hand, the plaintiff needs a regular stream of income. On the other, a defendant would bankrupt because of such an enormous expense in the millions. But both parties must agree on the terms of the settlement.
As a result, the settlement allows the parties to avoid a lawsuit. Thus, removing legal and other costs included during the trial.
The form of settlement started in Canada, as part of congenital disability claims arising out of mothers ingesting Thalidomide. Today structured settlements are the most used in the U.S. for various types of lawsuits. These include medical malpractice, product, aviation, auto, and construction liability. Besides, a structured settlement provides income tax and spendthrift provisions. Thus, Annuities allow the defendant to meet the requirements with ease. A lump-sum payment may strain the defendant or business.
The payout sometime called “periodical” payments, but when integrated into a trial judgment, a “structured judgment.”
Types of structured settlements
Types of structured payments and payment options address unique financial needs. The benefits are to both the defendant and the plaintiff. Still, the payout considers the defendant’s financial state. These types of customizable income streams are payable to the plaintiff in various trusts. These include settlement preservation trust, pour-over trust, special needs trust; Medicare set aside trust, or other recovery management trust. Besides, the payouts are payable in funds such as memorial funds and scholarship funds, as described below.
The claimant may need a structured settlement incorporating one or more of these income streams in a single contract. As a result, structured settlement payments are payable through ACH or electronic fund transfer. Thus, it is done through a bank account of the plaintiff, Payee, law firm, or attorney.
As a result, structured settlement payouts earn interest declared annually.
Structured settlement types
The annuity pays out to the plaintiff or beneficiary for a guaranteed number of years. It will provide a lifetime income stream to the plaintiff. Depending on the insurer, the payout can be weekly, monthly, quarterly, or annually.
For example, a quote of $3,000 per month for the next 30 years. Therefore, the claimant will receive a life annuity with a guaranteed for 30 years. In case the plaintiff dies before the timeline lapses, the payout continues to the beneficiary. The payment depends on the life of a Payee. If the Payee dies within 30 years, the amount stops. The beneficiary must be on the settlement agreement.
Temporary life annuity
A temporary life annuity pays the claimant for a designed number of years if the plaintiff is still living. Yet, it omits the part where the beneficiary takes over the payout after the claimant’s death before the time lapses. One draw of the temporary life annuity, also known as a periodic certain annuity, is consistency. In other words, the annuity ends when you die should the plaintiff pass before the guaranteed number of years.
The plaintiff agrees to receive the annuity in a lump sum at a future date. It means the payment will mature at a set date, for example, ten years into the future. The plaintiff corrects the full settlement amount at once, ruling out the need for periodic payments. Should the claimant not survive time, the payments go to the listed beneficiary.
Besides, a lump sum annuity payable with a provision the plaintiff will survive to the due date. As a result, the option lacks the beneficiary part in a Life Contingent Lump Sum.
Life only/ Joint survivor annuity
It is a life-only annuity with a monthly payout for life payable to the plaintiff. As a result, the beneficiary cannot take over the payout after death. In the case of a Joint and Survivor annuity, the plaintiff receives monthly payouts for life. But, in case of death, the beneficiary receives the annuity balance.
In a nutshell, all annuities suit the needs and terms of the claimant. Therefore, as you sort a structured settlement, ask lots of questions to get all the information before signing the contract.
Structured settlement examples
Cases resolved with a structured settlement are varied. Below are some of the structured settlement examples:
Personal injury: The structured settlement emanates for a claim due to severe injuries caused by the action of another person or company. A structured settlement, in this case, helps the claimant navigate life after a personal injury.
Wrongful death: The structured settlement results from a lawsuit filed by the survivors or dependents on of deceased. A wrongful death settlement made to the beneficiary of the dead due to the negligent action of another party.
Worker compensation: Employees injured or killed on the job compensated through a settlement case against the employer. Worker’s compensation settlements are encouraged by the U.S. tax code amended in 1997 for various reasons.
Vaccine injury: A vaccine injury settlement awarded to victims injured by mandatory vaccinations. Victim through an attorney file a claim against the federal government for a compensation trust fund.
Discrimination: Discrimination case awards are taxable. When distributed through a structured settlement, the beneficiary can escape the requirements. A structured settlement allows the recipients to defer the taxes until disbursement.
Wrongful imprisonment: An exonerated person may file a lawsuit against the government for the time spent in prison. The trial may also include all agencies that contributed to the wrongful conviction. A structured settlement helps the beneficiary manage the funds after the disbursement.
Molestation and sexual abuse: A victim of molestation and/or sexual abuse may file a case against the institution supposed to protect them. For example, a district school in the San Francisco Bay Area paid a settlement of $8.25 million to families of three gals. The girls molested by a fifth-grade teacher received 2.72 million in a structured settlement each.
Negotiating a structured settlement
Negotiating for a settlement in a civil case brings several parties together in the process. These include:
- Wronged person (the plaintiff).
- Person or company caused the harm (defendant).
- Case consultant (a qualified assignee)
- Life insurance Company.
Structured settlement Process
Step 1: The plaintiff sues the defendant
In a court case, the claimant seeks compensation for an injury, illness, or death caused by the defendant. The defendant may agree to compensate the plaintiff through a structured settlement. Therefore, avoiding a lawsuit trial. If the defendant does not agree, claim proceeds to trial for judgment. Thus, the defendant covers trial and court fees. As a result, a structured settlement payment to the plaintiff starts.
Step 2: Both parties work with a qualified assignee.
The judgment directs both parties to determine the best course for a structured statement contract. So, the parties work in terms with the help of a qualified assignee. The agreement includes:
- how much the regular payment will be.
- how long they should continue.
- whether they should increase.
- Should the larger payment supplement them at certain times?
The plaintiff dictates structured settlement terms. As a result, the defendant provides money to set up an annuity for the plaintiff by the assignee.
Step 3: Annuity for a Life Insurance Company
The assignee purchases annuity from a life insurance company. The annuity contract is set to match the plaintiff settlement needs. As a result, once the structured settlement annuity terms set, you cannot change them. For any pending medical or attorney fees, an immediate lump sum fund is set to cover the specifics.
Step 4: Life Insurance Company releases scheduled payments
According to annuity contract terms, the insurance company makes a series of payments over time to the plaintiff. Annuity payments earn interest, which protects the funds value against inflation.
A plaintiff can choose to get a full lump sum from a structured settlement instead of the scheduled payouts. The holder sells the right to part or all future payments on the secondary market.
You will also need a financial advisor and lawyer to help with the calculation of the structured settlement. Besides, formulas are complex, and sometimes you need to hire an economist to help value the contract.
How to get a structured settlement?
According to the National Structured Settlements Trade Association, the payments are best for people who need a regular income. Often this is the plaintiff who is unable to work and support the dependents.
- Individuals with permanent or temporary disabilities, preventing them from holding employment. Even worse, the disability may need ongoing medical attention and professional needs, which adds to living expenses.
- An individual who suffered severe injuries creating the need for long term medical and supportive care through a structured settlement.
- Minors found incompetent and need ongoing financial support due to injuries sustained awarded through a structured settlement.
- Wrongful death cases resulting in a structured settlement awarded to the surviving defendant as a source of financial support. The family needs funds for upkeep, which were previously filled by the deceased.
- All vaccine injury compensation claims resulting from young kids who suffered physical injuries and resolved with a structured settlement.
According to NSSTA, the more serious the injury, the more benefits from a structured settlement.
Pros and Cons of Structured Settlements
Structured settlements have both advantages and disadvantages. The plaintiff or beneficiary needs to consider whether accepting a structured agreement is the best option. Ask yourself if the payment relates to your unique circumstances. Besides, as you agree on a structured settlement, consider the tax implications and your needs for liquidity.
Your money goals should be the focus of the decision. If you need guidance, consult with a trusted financial advisor and your attorney.
The main benefit of receiving a lump sum payout is liquidity. The plaintiff will suddenly have a whole lot of cash never seen or held before. The same case happens after winning a, which creates a lousy situation for a new beneficiary. A lump-sum payout can only be good for an individual with a high level of responsibility. You need financial knowledge to control and manage such an enormous amount of money.
The lump-sum payout history shows a large number of individuals spend through their payout in a far shorter time. As a result, annuity payment lasts longer than lump-sum payouts.
Besides the limitation on profligacy, structured settlements fall under tax-free status. But the interest earned on a structured settlement is taxable. Still, the annuity interest of property structured settlement is not taxable. So, annuity interest is part of the agreement. You have all the right to keep your structured settlement.
The structured settlement also harbors some cons. Although this rarely happens, the future solvency of the paying party is in question. Think of it, if the paying party goes broke and cannot fund the annuity, the periodic victim payment ends.
A structured settlement suffers inflexibility. Once the terms of the structured settlement payout are set, they cannot be changed. The only option left is to sell on a secondary market, which will rely on the judge approved.
Even so, fixed payouts may not factor some variables such as inflation. Still, the factors increase with age-risk ratios. The plaintiff may lose the ability to access public funds such as Medicaid or Medicare. As a result, the annuity payments should go into qualified funding vehicles. These include custodial accounts and trusts.
The structured settlement arises when the defendant and the plaintiff agree to settle a claim in or out of court. Both parties agree, through negotiation, for money payable by the defendant. As a result, the plaintiff agrees to drop the lawsuit.
Civil lawsuits are expensive, and the losing party covers all the costs and fees included in the trial and judgment. As a result, the defendant avoids this when the success rate of the plaintiff is high. The structured settlement money comes in a series of periodic payouts done through an annuity.
As a result, settlements have become common in the U.S. due to the many advantages.