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Banking and Finance  » Financial Security through Structured Settlements

Financial Security through Structured Settlements

Structured settlements have become a natural part of personal

injury and worker's compensation claims in the United States,

according to the National Structured Settlements Trade

Association (NSSTA). In 2001, life insurance members of NSSTA

wrote more than $6.05 billion of issued annuities as settlement

for physical injury claims. This represents a 19 percent

increase over 2000.

A structured settlement is the dispersement of money for a legal

claim where all or part of the arrangement calls for future

periodic payments. The money is paid in regular

installments--annually, semi-annually or quarterly--either for a

fixed period or for the lifetime of the claimant. Depending on

the needs of the individual involved, the structure may also

include some immediate payment to cover special damages. The

payment is usually made through the purchase of an annuity from

a Life Insurance Company.

A structured settlement structure can provide long-term

financial security to injury victims and their families through

a stream of tax-free payments tailored to their needs.

Historically, they were first utilized in Canada and the United

States during the 1970s as an alternative to lump-sum payments

for injured parties. A structured settlement can also be used in

situations involving lottery winnings and other substantial

funds.

How a Structured Settlement Works When a plaintiff settles a

case for a large sum of money, the defendant, the plaintiff's

attorney, or a financial planner may propose paying the

settlement in installments over time rather than in a single

lump sum.

A structured settlement is actually a tradeoff. The individuals

who were injured and/or their parents or guardians work with

their lawyer and an outside broker to determine future medical

and living needs. This includes all upcoming operations,

therapy, medical devices and other health care needs. Then, an

annuity is purchased and held by an independent third party that

makes payments to the person who has been injured. Unlike stock

dividends or bank interest, these structured settlement payments

are completely tax-free. What's more, the individual's annuity

grows tax-free.

Pros and Cons As with anything, there's a positive and negative

side to structure settlements. One significant advantage is tax

avoidance. When appropriately set up, a structured settlement

may significantly reduce the plaintiff's tax obligations (as a

result of the settlement). Another benefit is that a structured

settlement can help ensure a plaintiff has the funds to pay for

future care or needs. In other words, a structured settlement

can help protect a plaintiff from himself. Let's face it: Some

people have a hard time managing money, or saying no to friends

and family wanting to "share the wealth." Receiving money in

installment can make it last longer. A downside to structure

settlements is the built-in structure (no pun intended). Some

people may feel restricted by periodic payments. For example,

they may want to buy a new home or other expensive item, yet

lack the funds to do so. They can't borrow against future

payments under their settlement, so they're stuck until their

next installment payment arrives. And from an investment

perspective, a structured settlement may not make the most sense

for everyone. Many standard investments can provide a greater

long-term return than the annuities used in structured

settlements. So some people may be better off accepting a lump

sum settlement and then investing it for themselves.

Here are some other important points to keep in mind about

structured settlements: An injured person with long-term special

needs may benefit from having periodic lump sums to purchase

medical equipment. Minors may benefit from a structured

settlement that provides for certain costs when they're

young--such as educational expenses--instead of during

adulthood.

Special Considerations

- Injured parties should be wary of potential exploitation or

hazards related to structured settlements. They should carefully

consider:

- High Commissions - Annuities can be highly profitable for

insurance companies, and they often carry very large

commissions. It is important to ensure that the commissions

charged in setting up a structured settlement don't eat up too

much of its principal.

- Inflated Value - Sometimes, the defense will overstate the

value of a negotiated structured settlement. As a result, the

plaintiff winds up with much less than was agreed upon.

Plaintiffs should compare the fees and commissions charged for

similar settlement packages by a variety of insurance companies

to make sure that they're getting full value.

- Conflict of Interest - There have been situations where the

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plaintiff's attorney has referred the client to a particular

financial planner to set up a structured settlement, without

disclosing he would receive a referral fee. In other cases, the

plaintiff's lawyer has set up a structured settlement on behalf

of a client without revealing the annuities are being purchased

from his own insurance business. Plaintiffs should know what

financial interest their lawyer may have in relation to any

financial services being provided or recommended.

- Using Multiple Insurance Companies - It's advisable to

purchase annuities for a structured settlement from several

different companies. This offers protection in the event a

company that issued annuities for a settlement package goes into

bankruptcy and defaults.

Benefits of Selling A Settlement A structured settlement is

specifically designed to meet the needs of the plaintiff at the

time it's created. But what happens if the installment

arrangement no longer works for the individual? If you need cash

for a large purchase or other expenses, consider selling your

structured settlement. Many companies can purchase all or part

of your remaining periodic settlement payments for one lump sum.

This can boost your cash flow by providing funds you can use

immediately to buy a home, pay college tuition, invest in a

business or pay off debt.

If you're considering cashing out your structured settlement,

contact your attorney first. Depending on the state you live in,

you may have to go to court to get approval for the buyout.

About two thirds of states have laws that limit the sale of

structured settlements, according to the NSSTA. Tax-free

structured settlements are also subject to federal restrictions

on their sale to a third party, and some insurance companies

won't assign or transfer annuities to third parties.

When selling your structure settlement, check with multiple

companies to make sure that you get the highest payoff. Also, be

sure the company buying your settlement is reputable and

well-established. And keep in mind that if the deal sounds too

good to be true, it probably is.

About the author:

David Springer is a consultant for Sovereign Funding Group.

Sovereign Funding Group is an experienced, reputable company

that offers convenient, no-risk services to help you with the

selling of your deferred payments and business financing

including structured

settlements.