Law gavel on a stack of American money

A Brief Guide to Structured Settlements

Since 1982, the federal government has empowered Americans to receive protection, peace of mind, and security via structured settlements. For over 50,000 recipients every year, these payments are life-changing.

Due to these payments, the recipients can cover future medical costs, plan for a predictable income stream after job losses and provide for their beneficiaries. That also helps alleviate pressure from the country’s welfare system.

If you’re wondering whether a structured settlement is viable for you, here’s a primer to help you understand what these settlements are and how you can benefit from them.

What Is a Structured Settlement?

A structured settlement is a financial tool offering payment to a plaintiff over a set period. Structured settlement services sit in direct contrast to lump-sum payments plaintiffs receive after the court awards them compensation (or upon settlement).

A structured settlement, also known as a structured annuity, is a financial product while also acting as a legal judgment. As such, structured annuities are private assets that submit to significant regulation.

Common Cases That End in Structured Settlements

Several situations can lead to a plaintiff opting for structured annuities. These include:

Personal injury: Where someone files a lawsuit against the person they believe harmed them seeking money

Wrongful death: Where family members of a deceased file a suit against the person they hold as the cause of the death due to negligence

Medical malpractice: Where a patient or their family bring a lawsuit against a doctor who causes harm due to their negligence

Orders compensation: Where workers receive financial compensation after a work-related injury or illness

In any of these circumstances, the goal of structured annuity is to offer periodic payment, which the experts at Rightway Funding say provides a predicate future income source.

How Does a Structured Settlement Operate?

Once a court determines that a defendant owes the plaintiff money as compensation, both parties bring on a consultant. The consultant is trained in helping determine the proper amount awarded.

After the consultant comes up with a number, the defendant pays up. But the money won’t then land in the plaintiff’s account. Instead, it’s used to buy an annuity from a life insurance company.

The insurance company will then manage the money independently. As a result, the plaintiff won’t have to keep interacting with the entity or person that wronged them.

Why Is a Structured Settlement so Attractive?

As a passive stream of income, structured annuities are all the rage. Here’s why:

1. Tax-Free

The most compelling reason for many structured settlement holders is that they are tax-free. Of course, there are a few exceptions to this rule.

For example, any compensation you receive due to emotional damage will be subject to taxes. However, any compensation as a result of personal physical injury is not subject to any tax.

Such an arrangement saves many people from the adverse impact of sudden wealth. Additionally, you don’t get to pay as steep a tax bill as when you opt for a lump sum payment.

2. Interest

Depending on the annuity your structured settlement invests in, you can receive interest on the asset. In absolute terms, your total compensation will grow compared to taking it out as a lump sum.

Furthermore, the interest you earn via a structured settlement is tax-free (depending on whether the type of compensation you receive is tax-exempt or not).

3. Market Safety

The money you hold in a secured settlement won’t suffer adverse impact from market fluctuations. Therefore, when the market is in freefall, your asset won’t lose money faster.

On the flip side, if the market suddenly registers a significant uptick, your asset won’t rise sharply in tandem. While that’s a potential downside for some, it does help you predictably plan for the money you receive through periodic payments.

4. Shelter From Outsiders

In some cases, having a structured settlement agreement can be a valuable way to shield your money from unwelcome parties.

For example, if you’re going through a divorce, your ex-spouse can’t touch the structured settlement income. Likewise, your creditors can’t gain access to your structured annuity.

5. Highly Customizable

When it comes to the payout arrangement under a structured settlement, you decide if you’ll receive the funds immediately or later on. If you have immediate medical needs or don’t have an income stream, immediate payments can be helpful.

You can also decide to postpone receiving any payments, and during this waiting period, the annuity grows due to interest income.

Some plaintiffs decided to wait till retirement to start receiving payments. Others opt to stretch the payments for the remainder of their lives. You can also choose to accept payments over a determined number of years.

It’s worth noting that you get to determine the schedule through which you receive the money. You also have a say in the amount of each payment.

Can You Sell Your Structured Settlement for Cash?

Once you receive the contract on your structured annuity, you can’t renegotiate the terms. And that can become a problem if your circumstances change and you need the money upfront.

Lucky, structured annuity owners have the option to get cash for structured settlement contracts. To do so, you have to sell some or all of the structured payments due you to structured settlement companies.

The types of structured payments you can sell include:

  • Deferred defined benefit
  • Treasury funded
  • Variable income payout
  • Time certain
  • Step annuity
  • Income for life
  • Index-linked
  • Joint and survivor
  • Term certain

You must go before a judge if you want to sell your structured settlement payments. A judge will decide whether to grant your application to sell the payments or not. For any sale to be legitimate, a notary needs to finalize it.

It’s worth noting that although you can sell all types of structured payments, some are a harder sell than others. That’s because some types of compensation are tougher to sell.

Thus, The cause of your settlement is crucial. For example, worker’s compensation is highly regulated, which can complicate a sale.

Provide Security for You and Your Loved Ones

Receiving a financial settlement in court is justice desired. However, unless you plan it out, your compensation may not help you much. Consider opting for structured settlements to gain a future flow of income.

Getting injured can throw your life’s plans out the window. Our website provides valuable information on how you can make the most from the financial settlement you receive. Check out more of our content to learn how you can make a court compensation cater to your needs for years down the line.