What is a structured settlement?

A method of settling a personal/physical injury claim in which the injured party receives income tax-free payments in the future, in combination with cash paid at the time of settlement.

When should someone consider a structured settlement?

Structured settlements can be ideally suited for cases involving the following situations:

  • Temporarily or permanently disabled plaintiffs or claimants
  • Guardianship cases, including minors or incompetents
  • Wrongful death cases where the surviving spouse and/or children need monthly or annual income
  • Severe injury, especially with long-term needs for medical care, living expenses and support of family
  • When a claimant prefers guaranteed income tax free payments rather than risking funds in the stock market
  • Claimants can structure their mortgage payments. Employing this strategy, as opposed to paying off a home loan in cash, would allow claimants to benefit from the tax deduction derived from mortgage interest.
  • To pay property taxes semi-annually

While there are many reasons a claimant would want a structure, one of the primary reasons is that the growth of a claimant’s settlement is considered recovery of personal injury damages, thus excluding these payments from gross income resulting in no taxes paid. Since the rate of return of a structure on an after-tax basis is close to the historical rate of stocks, one gets the investment value of the highest earning investment over the last eighty years without the risk of other investments. Plus, the claimant can pre-determine the outcome for the long term. No other investment can make this guarantee.

How is this done?

While the insurance company covering the insured could make the future payments, normally a life insurance annuity is purchased to fund the future payments.

What is an annuity?

An annuity is an IOU issued by a life insurance company to make future payments in exchange for immediate cash.

What happens to the payments if the claimant dies before the last payments are made?

The payments are made to the person designated by the claimant (claimant’s beneficiary) at the time of settlement or the claimant’s estate if no person is chosen. At a later date, the beneficiary designation can be changed or a beneficiary named, if none has been designated.

Why should the claimant structure versus investing in other investments such as mutual funds?

As the past few years have shown, stock and bond markets contain a large degree of risk. With an investment account funded by stocks and bonds, there is a statistical likelihood of the account running out with regular withdrawals while structures can be set-up never to be exhausted. If the claimant has the risk tolerance and discipline to invest in the market, a structure can provide a means of feeding money into the market to mitigate the risk of investing at an inopportune time.

What if the claimant has a sudden emergency and needs cash?

In any form of investment, one sacrifices immediate access to funds (liquidity) for rate of return. Thus, one may decide to take structure payments sooner realizing, like any investment, the rate of return will not be as high. Additionally, the claimant has the option of taking more in cash, provided they have the discipline to preserve the funds for an emergency versus other needs and wants. The reality is that it is easy to use irreplaceable settlement funds to solve life’s difficulties at the expense of exhausting these monies that will be needed later in life.

Do I have to structure all of my recovery?

Absolutely not, you can take any portion of your settlement in cash, and use the rest to fund the structure.