Understanding Structured Settlements: A Comprehensive Guide
Understanding Structured Settlements: A Comprehensive Guide
Have you ever wondered, “What is a structured settlement?” or “How could a structured settlement benefit me?” You’re not alone. Structured settlements are common outcomes in many legal cases. Still, their intricacies can seem complicated if you’re unfamiliar with these financial arrangements.
Life can be unpredictable. One day, you might find yourself on the receiving end of a significant financial payout due to an unforeseen event like an accident or personal injury.
Understanding a structured settlement is important. It enables you to make decisions that fit your financial needs and long-term goals. Doing so empowers you to make informed decisions.
WHAT IS A STRUCTURED SETTLEMENT?
Let’s start with the basics. A structured settlement is a financial or insurance arrangement wherein a person agrees to resolve a personal injury, wrongful death, or workers’ compensation claim by receiving part or all of a settlement in the form of periodic payments over an agreed period rather than as a one-time lump sum.
Structured Settlements Vs. Lump Sum Payments
Structured settlements and lump sum payments are two different methods of compensation. A lump sum provides a significant amount of money all at once, while a structured settlement spreads the payments out over time. This can be particularly beneficial for individuals with long-term financial needs or who might find managing a large sum of money daunting.
Why Are Structured Settlements Created?
They are created primarily to provide a steady income stream for individuals harmed due to others’ negligence or actions. A lump sum payment can be overwhelming and challenging when large sums are involved.
Tax Advantages of Structured Settlements
One of the key advantages of structured settlements is the tax benefits they usually offer. According to the IRS, these types of payments are often tax-free, making them a financially prudent choice for many individuals. However, the tax-free status of structured settlements may limit their consideration as income when applying for a mortgage or other types of loans.
What Does a Typical Structured Settlement Arrangement Look Like?
Suppose an individual was involved in a car accident and suffered significant injuries. The individual sues the responsible party and is awarded a $1 million settlement over 20 years. Instead of a lump sum of $1 million, the individual would receive $50,000 yearly for 20 years, providing a stable income while recovering or adapting to lifestyle changes due to the accident.
Let’s consider a few other examples to understand better how these settlements work in different scenarios:
A construction worker is injured on the job due to a third party’s negligence, such as a manufacturer of faulty equipment or a driver who caused an accident while the worker was on the job. In addition to filing a regular workers’ compensation claim with their employer, the worker may be able to pursue a third-party workers’ compensation claim against the responsible party.
If successful, the worker may receive benefits from the employer’s workers’ compensation insurance and the third party’s insurance or through a settlement. In this scenario, the worker gets a settlement of $750,000 over 30 years, with payments increasing by 3% annually to account for inflation.
A family welcomes a new baby, but due to medical malpractice during delivery, the baby suffers a serious birth injury that requires ongoing medical care. After a lawsuit, the family is awarded a structured settlement of $2 million to cover the child’s medical expenses and future needs.
The settlement provides for monthly payments of approximately $2,631.58, starting from the child’s 18th birthday and continuing for the rest of their life until age 75. It is important to note that the minor child did not have a say in how the settlement was structured.
A 35-year-old accountant was seriously injured in a car accident caused by a drunk driver. After a lengthy legal battle, the accountant finally received a settlement. The settlement included lump sum payments of $150,000 every other year for the next ten years and monthly life contingent payments of $2,500 for 20 years.
It is important to note that the monthly payments are life contingent, meaning they will continue for as long as the accountant lives. Life contingent payments are settlement payments tied to the recipient’s life expectancy. If the recipient passes away before the end of the payment period, the payments will cease.
What are the Key Points to Understand About Structured Settlements?
Structured settlements are financial tools designed to provide long-term financial stability to individuals who have suffered harm. In addition, they offer tax benefits and flexible arrangements tailored to the recipient’s needs and provide a means to manage significant compensation awards effectively.
Role of Annuities in Structured Settlements
An annuity is a financial product that ensures regular, scheduled payments to an individual over a specified period. This is typically purchased by the party responsible for paying the settlement, like an insurance company, to fulfill its obligation to the recipient. The annuity provides a steady income stream, helping recipients manage their long-term financial needs after a lawsuit or personal injury claim.
FAQs about Structured Settlements
This section answers common questions about structured settlements, from defining a structured settlement to its benefits.
What is a structured settlement, and how does it differ from a lump sum payment?
A structured settlement is a financial arrangement in which a person agrees to resolve a legal claim by receiving part or all of a settlement in the form of periodic payments over an agreed period rather than as a one-time lump sum. This differs from a lump sum payment, which simultaneously provides significant money.
What is the role of annuities in structured settlements?
Annuities are a fundamental aspect of structured settlements. An annuity is a financial product that provides a regular income stream in exchange for a lump sum.
When a settlement is reached in a lawsuit, the defendant or their insurer may agree to pay the plaintiff a sum of money over time rather than one lump sum. To ensure these payments are made on schedule, the defendant or their insurer purchases an annuity from an insurance company.
Can structured settlements be sold?
Selling a structured settlement for a lump sum payment may be possible. Companies like Liberty Settlement Funding and JG Wentworth can facilitate this process.
- Structured settlements transform a lump sum of money into regular payments over an agreed-upon period.
- Structured settlements are typically arranged after a successful lawsuit or out-of-court settlement involving personal injury, wrongful death, or workers’ compensation claims.
- A structured settlement agreement outlines the payment schedule, amounts, and duration.
- Annuities, financial products that deliver a steady income stream over a set period, are fundamental to structured settlements.
- Selling a structured settlement for a lump sum is often possible. Companies like Liberty Settlement Funding and JG Wentworth can facilitate this process.
Consult with our experts:
Your financial situation can change over time, making selling your structured settlement a potential option, but this move should be considered carefully. Liberty Settlement Funding is a trusted industry leader that can provide a lump sum in exchange for future payments, granting you the financial flexibility you need.
If you have questions about structured settlements or need personalized advice, our team of experts is here to help. Contact us today to schedule a consultation and receive professional guidance tailored to your situation. Contact Us.
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