Is a structured settlement right for me?

Introduction: Structured settlements are financial arrangements that provide long-term, tax-free payments to individuals who have won a lawsuit or settled out of court. These arrangements are often used in cases involving personal injury, medical malpractice, wrongful death, or other legal disputes. In this blog, we’ll delve into the details of structured settlements, how they work, their advantages and disadvantages, and considerations for those involved in such settlements.

What is a Structured Settlement? A structured settlement is a negotiated financial agreement between the plaintiff (the person receiving the settlement) and the defendant (usually an insurance company or corporation). Instead of receiving a lump sum payment, the plaintiff agrees to receive periodic payments over a specified period of time. These payments are typically tailored to meet the individual’s ongoing financial needs, such as medical expenses, living expenses, and other costs.

How Structured Settlements Work: When a lawsuit is settled or a judgment is awarded in favor of the plaintiff, the parties involved may choose to structure the settlement payments. This process involves the following steps:

1. Agreement: Both parties negotiate the terms of the structured settlement, including the amount of the payments, the schedule of payments, and any additional provisions.
2. Creation of the Annuity: To fund the structured settlement, the defendant purchases an annuity from a life insurance company. The annuity is designed to generate the periodic payments required by the settlement agreement.
3. Payments: The annuity issuer makes the scheduled payments directly to the plaintiff according to the terms of the settlement agreement. These payments can be tailored to meet the plaintiff’s specific needs, such as providing for ongoing medical care or replacing lost income.

Advantages of Structured Settlements: Structured settlements offer several advantages to both plaintiffs and defendants:

1. Guaranteed Income: The plaintiff receives a reliable stream of income over time, providing financial stability and security.
2. Tax Benefits: Payments from structured settlements are typically tax-free, providing a significant advantage over lump sum payments, which may be subject to taxes.
3. Customization: Payments can be customized to meet the individual needs of the plaintiff, including covering ongoing medical expenses, replacing lost income, or providing for future financial goals.
4. Financial Protection: Structured settlements help protect the plaintiff from the risk of spending the entire settlement amount too quickly or making poor investment decisions.

Disadvantages of Structured Settlements: While structured settlements offer many benefits, there are also some potential drawbacks to consider:

1. Lack of Flexibility: Once a structured settlement is established, it is difficult to change the terms or access additional funds, even in the case of unexpected expenses or financial emergencies.
2. Inflation Risk: The purchasing power of the periodic payments may be eroded over time due to inflation, especially if the payments are not indexed to inflation.
3. Counterparty Risk: There is a risk that the annuity issuer may default on its obligations, although this risk is typically mitigated by purchasing annuities from highly rated insurance companies.

Considerations for Structured Settlement Recipients: If you are considering a structured settlement or have already entered into one, there are several important factors to keep in mind:

1. Financial Planning: Work with a financial advisor to develop a comprehensive financial plan that takes into account your current and future needs, including budgeting, investing, and estate planning.
2. Review the Terms: Understand the terms of your structured settlement, including the schedule of payments, any provisions for inflation adjustments, and any penalties for early withdrawal or changes to the agreement.
3. Seek Legal Advice: Consult with an attorney who specializes in structured settlements to ensure that the terms of the agreement are fair and in your best interests.

Conclusion: Structured settlements provide a valuable option for individuals who have been awarded damages in a legal settlement. By providing a reliable stream of tax-free income over time, structured settlements offer financial stability and security for plaintiffs, while also providing benefits to defendants.