What are Structured Settlements?
A structured settlement can be described as a future stream of payments (either lump sum or periodic) which are paid by an insurance company as compensation for medical malpractice, wrongful death claim, personal injury, or any other liability. Such payments are usually exempted from tax and they are designed in order to compensate a person for lost wages, suffering and pain or other losses of similar kind.
History of Structured Settlements
People used to receive large lump sum amount of money, in case of winning a personal injury lawsuit. It happened for a long time. Many recipients found it difficult to manage the lump sum to pay their expenses continuously, which led to the establishment of structured annuity in 1980s in order to encourage out of court settlements of lawsuits, set up a stream of future payments which would fund lost wages, medical expenses and other needs of financial planning all while being exempted from tax for the injured party. Over the years, the industry has grown, and in 2015 alone, the investments in structured settlements were about $5.3 billion.
Where Do People Get Structured Settlements?
Legal settlements might be obtained by a number of ways like, through workers compensation or personal injury cases. Following are some of the most common reasons:
A structured settlement might be the result in case some is compensated for wrongful death of some family member.
In case a person win a large award, the amount is put in structured payments over time, that are designed to help the person pay the medical expenses
In case someone gets injured at the job, they might get a structured settlement in order to help them with expenses. It should be noted that a structured settlement which is related to workers compensation cannot be sold. It is prohibited by law.
Pros and Cons of Structured Settlements
A number of advantages are provided by structured settlements, but they might outlast the usefulness at times. Following are pros and cons of a structured settlement.
- A major advantage of a structured settlement is that the principal as well as the interest which accrues over time are exempted from taxation. As a result more money is received over time
- The payments may be scheduled to start right away. They can be deferred for future and can go on for any time period to cover the anticipated expenses or as income supplement.
- In most of the economic conditions, structured settlements are quite dependable, as they are paid by some of the best insurance companies
- s happened at least twice in past.
- They don’t have much flexibility. Once the terms are set, one might have to wait months or even years to get paid.
- In case of some emergency or a sudden need of cash, one cannot access funds, so that he can get that money to take care of the expenses.
- Although, you are entitles to receive the money in future, you cannot make use of any investment opportunities.
- In case of a period of rising interest rates or higher inflation, value of the structured investment deteriorates and one may lose the money.
- The insurance companies are mostly reliable, however, they can get liquidated and it ha
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Structured Settlements for Minors
Earlier structured settlements had been used in order to pay for financial awards for cases of personal injury which involved minors, but the defendants used to make the payments to the parents of those children. This resulted in parents getting the complete access and control over that money, and it was sometimes spent irresponsibly.
Now timed payouts are used in such cases to make sure that the minors are able to make use of the money in their future.
Governing Laws for Transferring Structured Settlement Payment Rights
Rights of those who receive the structured payments are protected by laws in 48 states. These laws of different states are similar in some aspects while differ in some. You should ensure that you understand the rights which are applicable in your state.
It is reaffirmed in the S. 5891 of the internal revenue code which was enacted in 2002, that a person has a right to receive cash proceeds by selling his/her structured settlement future settlement tax free in most of the circumstances.
It came in to existence after the victims of 9/11 and their families started recovering the financial compensation. It gives them counseling as well as instruction which they may use in order to make smart decisions before selling the structured settlement.