How does a structured settlement for personal injury differ from a settlement or award?
A settlement or judgment for a personal injury claim may be paid to the claimant by the defendant or the defendant’s insurance company in a single lump sum payment. The majority of settlements are paid in this way.
But in cases where the claimant (plaintiff) settles or is awarded a large sum of money, they may elect to receive all settlement funds in steady payments or a one-time partial disbursement of the settlement funds with recurring payments disbursed over a period of years or decades. This is called a structured settlement.
An initial partial disbursement of a structured settlement can and should be used for immediate expenses including, but not limited to medical bills, medical devices, convalescence, therapy, career training, special housing and transportation requirements or any other necessities unique to the injured person. The remainder of the partial disbursement may be invested or posted to a banking account to be used for living expenses or unforeseen future necessary expenditures. After the bills are met, the claimant is free to decide what to do with the remaining partial disbursement of funds.
Advantages to structuring your settlement over time
Some studies indicate that recipients of very large lump sum settlements or “windfall” awards frequently run out of the funds necessary to sustain their disabilities throughout the remainder of their lives. Sadly, this scenario may occur when the parent or guardian of an injured child lacks the experience of managing a large sum of money. One of the advantages to a structured settlement distributed over a period of years is the economic security and well-being of the disabled or partially disabled person.
There are also tax advantages to structuring your settlement. Although settlements and awards for physical injuries are generally tax exempt, interest and dividends earned on the investment of a single lump sum asset is taxable. Even if all of the funds received in a structured settlement are invested, the annual tax obligation would likely be lessened due to a reduced investment stream.
Will I make decisions regarding the distribution of my structured settlement?
A structured settlement is funded by way of an annuity purchased by defendant for the behalf of the claimant. When you agree to settle your lawsuit by way of annuity, your personal injury lawyer will facilitate a consultation with a qualified economic and financial analyst who will calculate your monthly or annual financial needs against mortality and inflationary tables. A qualified and trusted financial advisor will discuss your goals and the options available to you, i.e. the sums you wish to receive and the length of time over which you may extend your payments. You may choose to end disbursement of your funds at a designated age, terminate payments upon your death or continue with payments made to your heirs through the remaining life of the financial instrument. You may even elect to withhold regular payments until you reach a certain age to fund your retirement.
Why do insurance companies offer annuities to injured parties?
Because funds are invested in an annuity (a financial instrument that is expected to grow over time) the initial investment made by defendant or defendant’s insurance company is significantly less than the totality of the expected future income stream received by the claimant. Unless the claimant wishes to make a large purchase, such as a home, from a lesser settlement, say, for example, a settlement of $100,000., a structured settlement can be a win-win situation for both parties.