What Is a Structured Settlement?

A structured settlement is an agreement for periodic payments from an insurance company. For example, you file a lawsuit against a grocery store where you have a slip and fall. The grocery store is held liable for your injuries, but it has an insurance policy to cover the claim. As a result, you will enter into an agreement with the insurance company to resolve the payments.

Benefits

The main benefit of a structured settlement is financial management. On your end, it is easier to plan your finances when a payment is spread out over a length of time rather than paid out all at once. It may also be beneficial for your tax liabilities.

Problems

If you are financially savvy, you may feel you can invest the money in your settlement and turn a profit rather than waiting to receive the money for years on end. In this case, it may be better to receive the lump sum payment, even if it is slightly lower than the structured settlement. The exact details will have to be arranged with the payer.



Advantages of a Structured Settlement



An insurance company may offer you a structured settlement if you win a claim. You will not receive an immediate check for the money you are owed. Instead, you will receive this money through periodic payments. Depending on the terms of your settlement, you will receive different amount of money. A structured settlement has many advantages over a lump sum payment.

  • You will usually receive more money by accepting a payment plan.
  • Financial planning, including tax planning, can be easier with the help of a structured settlement.
  • Add additional income to your salary each year, rather than receiving a bulk check.
  • You can slowly account for the additional income over time with a structured settlement, making better use of the funds.
  • Structured settlements may have certain tax advantages over other forms of income making them affordable.
  • If you are unsure how to invest your money, or are not good at budgeting, a structured settlement can offer significant protection.


Possible Disadvantages of Structured Settlements



You may think structured settlements are just a different way to receive the money a financial institution owes you. However, a structured settlement rarely pays dollar for dollar what a lump sum pays. Commissions, fees, and inflation can all affect the sum you actually receive in the end. Further, since the money is held by another institution until it is paid to you, you cannot use it for any major purchase or investment. Most financial advisers believe, even conservatively invested, the money in a structured settlement will be worth far more through early investment than it can be worth through periodic payments over time.



Can you garnish or lien structured settlement payments?



Structured settlement payments can be used as income to the recipient. In a situation where wage garnishment is possible, it is also possible to garnish structured settlements. For example, if you are a borrower who has defaulted on a home loan, the lender may sue to to receive the payments you owe. Even if you have lost your job or receive no other income, if the lender finds out you have a structured settlement in your name, they can ask a judge to garnish the wages you receive from the settlement.



Selling a Structured Settlement



If you are considering selling a structured settlement, be wary that some offers are too good to be true. Structured settlements are designed to provide you with the many benefits, if you hold on to the plan. In some cases, you may find yourself in the middle of a structured settlement and may need a lump sum.

Deciding to Sell a Settlement

Consider the benefits of selling your structured settlement, the first of which is a lump sum of cash. Ask yourself why you need the money and whether it is it an emergency. Ask yourself if you simply looking for an increase to your income. Ultimately, selling a settlement will always leave you with less cash than if you allowed the settlement to mature. You should only decide to sell if you are in a situation where the immediate benefits will significantly change your financial situation. For example, you may be facing default on a loan or foreclosure on your home. In this case, a sale may be wise.

Following Legal Regulations

Unfortunately, once you decide to sell, you will be caught up in a tricky world of legal regulations. About 60 percent of all US states forbid the selling of structured settlements. If you are allowed to sell, you must do so in the midst of federal regulations. Always ensure you follow all state and federal laws, because you can risk losing your entire benefit.

Entertaining Offers

You do not have to accept the first offer you see. Typically, once you decide to sell, you will find advertisements from companies that specialize in purchasing structured settlements. These companies can survive because they turn a large profit. Instead of going with the first offer, wait to entertain offers from different companies and individuals. You may find that different buyers offer significantly varied offer prices and it will be worth your while to wait for the best offer you can find.

Tax Consequences to You and the Buyer

Structured settlements are designed to help individuals, who are receiving money as the result of injury, to receive the maximum benefits. This means the federal and state government overseeing the payments will allow for certain tax benefits; namely, the sum may be taxed at a lower rate than the other parts of your income annually. Once you sell the settlement, however, you fail to receive these benefits in the future. The buyer of your settlement may also lose the benefits. In fact, your sales income on the settlement may be taxed at a very high rate, further compromising the benefits of the sale. Always speak to a lawyer about the tax consequences before moving forward with a sale.  Also, consult a CPA or accountant for important tax consequences as well.



Things to Consider when Entering into a Structured Settlement



Your insurance company may attempt to arrange a structured settlement plan if you win a claim against the company. With this arrangement, the structured settlement will allow periodic payments to you rather than providing you with a lump sum. This may sound like a fair deal, but look out for these problems with structured settlements.

Periodic Purchases

If you would like to make a large purchase during the life of your settlement, you may not have the funds available to do so. For example, you may know your insurance company is currently paying out $200,000 to you in $20,000 annual payments. If you want to buy a house this year, the annual payments do not help as much as the lump sum would. Consider this scenario when setting up your arrangement.

Investment Potential

You may be able to invest the money you receive in a lump sum today, turning the money into a much greater value in the future. If the insurance company holds onto the money, there will be no investment potential. For this reason, it can be in your best interest to take a lump sum settlement even if the figure offered is lower than the total payout would be over time with a structured deal.

Excessive Commissions

Beware of commissions your insurance company, agent or attorney is charging during the process of setting up a structured settlement. It is not uncommon for the agent to charge high fees for paying out a settlement. Check the terms of the settlement contract before agreeing to any commission structure. Make sure that a commission is disclosed.

Overstated Value

Your insurance company may attempt to overstate the value of the payments it is making to you. In doing so, it may be eligible for specific rebates, legal protections or methods to otherwise reduce the actual money it will pay you as part of the settlement. Build your contract to ensure that any financial benefits given to the insurer, as a result of your contract, come directly to you rather than staying in the company's pocket.

Conflict of Interest

Make sure that your attorney has no ties with the insurance company you are filing a claim against. In some cases, attorneys will earn a commission by convincing their clients to accept a structured settlement. It is illegal for an attorney to do this without letting you know. However, it is very difficult to track down and catch the culprits so it happens all the time.

Life Expectancy

Do not accept a structured settlement if you feel you will not be around to see the payments. This is an unfortunate reality if you receive your settlement late in life. It is in your best interest to assure payments are made to you immediately, when you need it most, rather than at a point in your life when you cannot appropriately invest, save or spend the money. Consider your financial needs when you accept a structured plan.

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