Complete Guide to Structured Settlement: Understanding the Concept and Terms

Last Updated on December 5, 2020

What Is A Structured Settlement?

A structured settlement is a negotiated financial or insurance agreement whereby a plaintiff agrees to resolve a personal injury tort by receiving part or all of a settlement in the form of periodic payments on an agreed schedule, rather than in the form of lump sum.

As part of the negotiations, a structured settlement may be proposed by the defendant or requested by the plaintiff. Ultimately, the two parties must agree on the terms of the settlement. Settlement can allow parties to a lawsuit to reduce legal and other costs by avoiding a trial.

Common Reasons for Structured Settlements

There are a number of reasons why an individual may receive a structured settlement. The most common cases are:

Personal Injury

A personal injury case is a civil case where someone who’s been harmed files a lawsuit seeking money from the person believed responsible for the harm. Money in the form of a structured settlement helps recipient pay for medical expenses or other costs.

Workers’ Compensation

Most people know about workers’ compensation, which pays workers who get injured on the job while they recover. Payments can be used as wage replacement or to pay for medical treatment and other expenses during periods when injured employees are unable to work.

Medical Malpractice

In some unfortunate cases, doctors can do more harm than good. In this instance, injured patients or the families of deceased patients can sue for medical malpractice.

Wrongful Death

A structured settlement is also a common way to compensate family members who claim loved ones were victims of wrongful deaths. Families may be entitled to receive a stream of tax-free payments to replace income after a loved one’s death.

Negotiating a Structured Settlement

The process of settling a civil case through a structured settlement involves the person who has been wronged (the plaintiff), the person or company that caused the harm (the defendant), a consultant with experience in such cases (a qualified assignee), and a life insurance company.

Structured Settlement Agreement Process

  • The plaintiff sues the defendant to seek compensation for an injury, illness or death the defendant caused. Often the defendant agrees to give money to the plaintiff through a structured settlement in order to keep the lawsuit from going to trial. If the case does go to trial and the judge rules in the plaintiff’s favor, the defendant may then be forced to set up a settlement.
  • The defendant and the plaintiff work with a qualified assignee to determine the terms of the structured settlement agreement — that is, how much the regular payments should be, how long they should continue for, whether they should increase or be supplemented by larger payouts at certain times, and so on. The defendant provides money for the qualified assignee to buy an annuity for the plaintiff.
  • The qualified assignee purchases an annuity from a life insurance company, setting up the annuity contract to match the settlement needs. Once the terms of the annuity are set, they cannot be changed. An immediate lump sum may also be set aside to cover attorney fees or to fund a specified trust.
  • The life insurance company pays the plaintiff a series of payments over time, according to the terms of the annuity contract. The annuity earns interest to protect its value from inflation, and the only way for the plaintiff to get cash from the settlement ahead of schedule is to sell the right to future payments on the secondary market.

Understanding Structured Settlement Annuity Contracts

When the defendant and the plaintiff in a lawsuit agree to settle a claim with a structured settlement, the parties negotiate a cash amount payable by the defendant in exchange for the plaintiff dropping the lawsuit.

The money is distributed as a series of periodic payments, typically funded through an annuity, which is a financial product that guarantees regular payments over time from an insurance company.

The agreement details the series of payments the person who was wronged will receive as compensation for the harm done to them. Spreading the money over a longer period of time offers a better future guarantee of financial security because a single payout can be spent quickly.

Benefits of a Structured Settlement

One of the greatest benefits of a structured settlement is that it provides substantial security and financial independence by ensuring that settlement is available to the plaintiff and / or his or her family, often for a lifetime. In addition, there are many other benefits:

  • Tax-free Income: 100% of structured settlement annuity is tax-free – including the settlement award, principal, ongoing payments and interest earned.
  • Customized Payments:  Payment amounts can be designed to meet a plaintiff’s specific cash flow needs, including medical and educational expenses, big-ticket purchases, and everyday living expenses.
  • Guaranteed Income for Life: The structured settlement is often designed to pay for the duration of the plaintiff’s lifetime.
  • Cost of Living Adjustments (COLA): A COLA may be built into a structured settlement design to provide for annual cost of living increases, such as 2%, 3%, or 4%.
  • Substandard Age Rating: A substandard age rating may be available upon review of the plaintiff’s health history. The health injury or illness does not have to relate to the lawsuit or settlement claim. This “rated age” may reduce the cost of the structured settlement or increase the rate of return, enhancing the payments.
  • Direct Deposit: As a safe and reassuring alternative to structured settlement payments being mailed to the plaintiff, structured settlement annuity payments can be deposited directly into the plaintiff’s checking or savings account.
  • No Management Fees: Unlike many other investment vehicles and products, structured settlements do not charge management fees, commissions, or expenses.
  • Risk Protection: Structured settlements are designed to help plaintiffs and their families avoid financial risks, including: Financial pressure, bad advice, or requests from friends, family members, colleagues, and outside sources, excessive spending, mismanagement of funds, bad or risky investments, volatile market changes, and running out of money too soon – the structure is a strong retirement planning tool guaranteeing the retired and senior adult income that does not run out before death.

How Is a Settlement Paid Out?

Compensation for a personal injury can be paid out as a single lump sum or as a series of periodic payments in the form of a structured settlement (in which the plaintiff receives monthly payments for a specified period of time).

Note: Before you agree to a structured settlement, discuss your payout options and the full terms of the contract with an attorney or financial advisor.

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