A structured insurance settlement is an agreement between the plaintiff and the defendant where the plaintiff agrees to accept a stream of payments in lieu of a lump sum payment. It is often used to settle cases that involve large sums of money. This type of settlement means that the monies owned to the plaintiff or claimant will be paid out over a period of time versus being paid all at one time in a lump sum.
The term structured insurance settlement simply describes the settlement between the parties has been structured for payments over time. The structured insurance settlement is usually carried out by securing an annuity. The annuity will guarantee the payments.
There can be a lot of flexibility around how the structured insurance settlement is put together. For example, the settlement could be structured so that payments are made annually for a specified number of years. The settlement could also be structured where there are lump sum payments at specified intervals. Basically the parties can agree on how the settlement should be structured based on the plaintiffs needs.
Why Have A Structured Insurance Settlement
One of the main reasons to opt for a structured insurance settlement is taxes. By structuring a settlement where the payments are made over time, there is the possibility to avoid a large tax liability. A settlement can be put together where income taxes can be significantly reduced and there is even the possibility that the settlement could be tax free.
Another key reason for a structured insurance settlement is to make sure when the funds are needed they will be there. The reason for the settlement in the first place was because of some need that the plaintiff incurred due to the negligence of another party. The last thing you would want to have happen is not to have the money to take care of those needs. Let’s face it, it could be difficult to manage a large lump sum payment at one time. There is the temptation to spend the money on “things” or to give money to relatives or other people who may approach you about their needs. It can be very difficult to tell people that you are close to that you can’t help them. Just as there are many cases of people who have squandered lottery winnings, there are many horror stories of people who have lost millions from settlements received in one lump sum.
The Downside Of Structured Insurance Settlements
Some people who enter into structured settlements feel trapped by the periodic payments. They may wish to purchase a new home, or other expensive item. Yet, they are not able to because they can’t borrow against future payments under their settlement. For example you may want to buy a new home, but you don’t have the money to make a down payment. And, you can’t get a loan against the settlement because it is not allowed in the settlement agreement.
When you are thinking about purchasing a home, a structured settlement cannot be used as collateral for the home loan because of the laws in place regarding them. To help protect consumers from being abused in regard to what happens to their structured settlement, using the settlement as collateral for a home loan would void certain protection laws. However, you can claim a structured settlement as income when applying for a home loan.
If you have the discipline to invest the lump sum payment yourself, then the lump sum option could be good for you. The reason why is the return you get from investing yourself will often be higher than what you would get from the structured settlement. Of course you also want to keep in mind you can sell structured settlements.