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Structured Settlements

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Structured settlements are scheduled installments of money paid over time to people who win injury lawsuits or jury verdicts. They can prevent overspending and can be used for many financial needs including saving for retirement, future medical needs or college tuition.

Winning a large settlement or a jury verdict from a drug or medical device lawsuit can change a person’s life. In many cases, plaintiffs and their families may get much needed financial relief for medical bills and money to get treatment they need to get better. Ideally, a lawsuit settlement helps deflect the cost of care and living expenses.

However, the average person who gets a large sum of money all at once might not know the best way to manage it. This could lead to the money running out far more quickly than planned and leading to financial hardship and lack of resources for future medical care.

One way to manage a large settlement or jury award is by opting to get the money paid out in installments through a structured settlement. These payments are backed by life insurance companies that issue annuities to guarantee the money, regardless of market fluctuations.

Because the settlement is paid in installments, there is less chance of funds being mismanaged, and plaintiffs are guaranteed tax-free, long-term income. All the terms are of the settlement are arranged ahead of time. Just like any financial product, however, there are pros and cons to structured settlements.

How is a Structured Settlement Awarded?

After a lawsuit settles or a jury returns a successful verdict to the plaintiff, the amount won can be set up into a structured settlement. Attorneys on both sides will set up terms agreeable to the plaintiff that suit his or her financial needs. A structured settlement consultant is usually involved in the process to help customize the plan for the claimants needs.

After the official agreement and terms of the pay schedule are determined, the defendant then transfers liability and obligation to one or more third parties called assignees. The assignee then buys annuities from one or more life insurance companies. The insurance companies then pay the installments to the payee.

Should I Opt for a Structured Settlement?

Before structured settlements, people who won money in injury lawsuits received their money in one lump sum. While this seems like a good idea, statistics show that claimants ended up losing all their money within a few short years of receiving their settlement.

According to a 2013 Prudential survey of people who accepted a lump sum, 30 percent said they had less money left than they expected after just three years. In another survey, over half of the people who received a lump sum said that they had spent the entire amount and had nothing left in a few years.

One of the benefits of a structured settlement is that it protects the money from being spent too quickly or frivolously. This can provide greater security, especially to someone who is disabled or may not be able to work.

Pros

Other benefits include:

  • Lifetime payment stream to make sure plaintiffs have enough money while they are alive
  • The chance to save money on legal costs
  • Tax-free income stream
  • Ability to set up payment terms
  • Financial security
  • May shorten the litigation process, avoiding more costly jury trial
  • Fixed amount not subject to the fluctuations of the market
  • Can accrue tax-free interest

Cons

Of course, there are also possible downsides to setting up structured settlements.

  • Because terms are agreed upon ahead of time, a plaintiff might not foresee a change in financial needs in the future. Once the terms are decided upon, they cannot be changed.
  • Funds cannot be taken out of the annuity at any time other than the scheduled payment time. The money cannot be accessed in case of an emergency.
  • You will pay IRS penalties if you withdraw money early.

What Can I do With My Payments?

When setting up the terms of the structured settlement, there are several options and the terms can be highly customized to fit the needs to the claimant and their family. The uses of settlement funds don’t have to be limited to setting aside money for living expenses.

Some uses of structured settlements funds:

  • Setting up a college tuition plan
  • Enhancing retirement funds
  • Address future medical expenses
  • Rehab expenses and assisted living arrangements
  • Cost of living enhancement

Example of a Payout Plan

John, a 60-year-old man with Type 2 diabetes, took Takeda’s drug, Actos to help control his blood sugar. After two years, John was diagnosed with bladder cancer. He filed a lawsuit against Takeda and after the case was settled John received $500,000. Fortunately for John, he was able to treat his cancer, and it went into remission. He met with a financial advisor and decided that a structured settlement would be best for his needs and those of his family.

$500,000 Settlement:
Attorney Fees $220,000
Cash at Settlement $20,000
Structured Settlement $260,000
Benefits
  • $500 per month with cost of living adjustment ($60,000, year 1-10)
  • $1,000 per month for 10 years ($120,000, year 11-20)
  • $15,000 per year for 4 years, college tuition for grandson ($60,000, year 10-13)
  • $20,000 lump sum payment for end of life expenses (year 20)

In addition, interest earned on the settlement, depending on the rate, would add additional money to the investment value. The total value of the settlement would exceed the original amount invested in the annuity.

Getting Money From a Structured Settlement Out of Schedule

Unfortunately, structured settlements are not made for emergencies or changes in life situations. They are meant to be long term and fixed. If you need to buy a new car or a house or there was a medical emergency, you cannot get money out of your settlement when it is structured.

However, what you can do is sell your settlement to a company that will buy it at a discounted rate. Depending on the company and market conditions, the rate will vary. You can sell all or part of your settlement.