What are structured settlements and how do they work? Not everyone comes across the term structured settlements in their lifetimes. For some who do, it’s either they are extremely lucky, such as winning the lottery or have their luck run out, by suffering injury and/or damage resulting from the fault of another person. In a structured settlement, instead of receiving a lump sum payment, the process would provide for a payout to be made over a scheduled period of time.
In essence, a structured settlement works as an annuity, where the party who is required to pay purchases an annuity, or a form of insurance, where its earnings would be used to pay the obligation to the recipient. The other means is to have a third party accept the obligation to pay the recipient over a period of time.
Common Terms in Structured Settlements
Since this is a very technical process, the following are some of the common terms used in structured settlements:
- Annuity Contract. This is the formal written agreement between the insurance company and an annuitant, or a person entitled to receive the payments, which details the obligations of the parties to the contract. It also details the specific terms of the annuity, such as the schedule of payments to be received under the Settlement Agreement and Release.
- Assignment. An assignment is the transfer of a right, interest or obligation from the giver, the Assignor to the recipient, the Assignee. In structured settlements, a third party would assume the obligation to pay the amounts under the structured settlement from the issuer of the Annuity.
- Lump Sum Annuity. A lump sum annuity is a single payment set at a specific future date or an installment of larger amounts at specific future dates.
- Net Present Value. This is the value of the present amount of an investment future net cash flow after deducting the initial investment. This is one of the richest tools to estimate the value of an investment or a proposal under a structured settlement.
- Settlement Agreement. This is a legal instrument formalized by parties to a lawsuit or claim stating the facts of the case and the terms how liability is released the defendant and insurer. The payments are to be made by the respondents through the purchase of an annuity as well as the consent by the recipient of the annuity.
Structured settlements are the means where civil cases are resolved extra-judicially. It is also economically sensible, as the paying party would compensate the injuries and/or damages inflicted upon the recipient. To further support this, the US Congress had passed laws back in 1982 to exempt large settlements agreeable to parties as well provide specific protections upon the victims or recipients.
Most common structured settlement legal questions
In order to further assist in understanding the legal concept and consequences of structured settlements, the following are the most common questions asked about the legal construct:
- Can structured settlements be used as collateral for a loan? In general, a structured settlement cannot be used as collateral for a loan. The current laws in force are designed to protect the recipients from unscrupulous scams that would dissipate the value of the payment scheme. A structured settlement though can be used as a declared asset that can be used as one of the means to pay off a loan.
- Can a structured settlement be returned in exchange for a lump sum amount? This is a definite no. A structured settlement once formalized enjoys legal benefits such as tax exemption on the proceeds.
- Do structured settlements earn interest over the period of the payouts? There is no interest earned for payments and is already integrated into the settlement agreement. Once received though and the settlement payments are reinvested where it earns interest, this interest earnings become taxable.
- Can I sell my structured settlement? Technically, it is an asset with a legal support for its effectivity. Now, its sale is not allowed but it can be transferred or assigned for consideration through known legal channels. The main drawback in transferring the structured settlement to a third party would be for a value that is much lower than the true value of the payouts.
Benefits of Structured Settlements
Knowing all these facts, the next question would be what are the beneficial effects as well as the negative effects of entering into a structured settlement?
One of the benefits of a structured settlement agreement is the security that the recipient, the injured party would receive an amount every single time for the purpose of recuperation or rehabilitation. It would avoid the instance where the recipient would lose all the money in one fell swoop.
On the other end of the spectrum, one of the drawbacks of a structured settlement agreement would be its static nature. This means, once it has been set into motion by judicial decree, it cannot be avoided or modified by the recipient. This would mean it cannot be transformed into a lump sum demand payment.
Overall, the basic facts of structured settlements are the following:
- This is a judicially confirmed agreement that excuses the liability of a wrongdoer through the payment of amounts to the injured party over a period of time for rehabilitation and/or recuperation.
- Structured settlements have specific terminologies used that determine the content as well as the progress of the process to be undertaken.
- Structured settlements have qualities unique to its existence, which have been put in place by legislative enactment detailing what are allowed when using structured settlements.
- There are both benefits and drawbacks to structured settlements and it is up to the recipient to determine to push through with it or not.
Ultimately, a structured settlement serves a specific purpose for those seeking remedy for a wrong done. It can also be the fail safe for those who won the lottery through installment payouts for the winnings. In the end, structured settlements are a means to an end, an end which serves the benefit of the recipient in the long run.
This article explained the basics of structured settlements and their benefits. For more information refer to our in depth structured settlement guide.