A structured settlement pays out money owed from a legal settlement through periodic payments in the form of a financial product known as an annuity. Money from a personal injury or medical malpractice case gets distributed over a longer period to provide for long term needs.
When those needs change, the contract typically cannot be changed. However, those receiving settlement payments can choose to sell future payments in exchange for a lump sum.
Structured Settlements Explained
Legal language aside, structured settlements are simple. In a civil case, someone is either forced or agrees to pay someone else money to right a wrong. Instead just writing a check, the at-fault person outs the money towards an annuity from a life insurance company. In that annuity contract are details on the series payments the person who was wronged will receive from the life insurance company.
The process is around 40 years old. In the 1970s, the courts ruled that a medication called Thalidomide given to pregnant women was responsible for serious, lifelong birth defects, structured settlements emerged as a way to make sure the money awarded to the child lasted a lifetime.
Still, today, most settlements from civil cases are lump sums. There are two key differences between lump sum settlements and structured settlements: long term security and taxes. By structuring the money over a longer period of time, a structured settlement offers a better future guarantee of money than a single payout which can be spent quickly. Money you receive from a personal injury is almost always tax free when you receive it. However, once the money is yours, you’re liable for taxes and dividends from the lump sum.
Why People Receive Structured Settlements
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.
A structured settlement is also a common way to compensate the family of someone whose death was the subject of a wrongful death claim. Families may be entitled to receive a stream of tax free payments, to replace the loss of income previously earned by the lost loved one.
Most people know about workers compensation, which pays out workers who get injured on the job while they recover. Payments can be used for medical treatment and wage replacement during periods when injured employees are unable to work and other expenses.
Structured Settlement Options
Structured settlement recipients have several options to choose from when determining how to receive their award. Structured settlement options include receiving:
- The entire amount in equal payments over a period of time, also called Time Certain.
- The entire amount in unequal payments over the period of the Term Certain agreement. For example, the payments may increase or decrease in amount over time.
- Payments until the recipient dies, also called Life Only.
- The entire amount in payments until the recipient’s death, at which point a beneficiary will become the new recipient of payments until the term of the agreement has ended.
- A lump sum payment after the annuity is awarded, or at a later date, such as with a deferred annuity.
- A lump sum initially for a part of the total amount, followed by recurring payments until the end of the term.
- Delayed payments that may begin at a certain date or age, such as when the recipient enters retirement.