Structured Settlements – What They Are and How They Work

Structured Settlements

Instead of taking one lump sum, structured settlements are tax-free payments that are meant to be paid over time. They can be used to pay bills or for other expenses. A structured settlement is a type of civil lawsuit that involves settling wrongdoing. It can be done by anyone who wants to pay to right a wrong.

For the plaintiff, a structured settlement provides long-term financial security. If the amount of money involved is small, the wronged individual can choose to receive a lump sum instead of a structured settlement.

The at-fault individual can then put the money into an annuity, which provides regular payments to the insurance company. The terms of the settlement detail how the money will be distributed. It avoids paying out too much at once and can provide better financial security for the recipient. Some plaintiffs later choose to cash out their structured settlement and sell their future payments to Settle4cash or JG Wentworth.

How Did Structured Settlements Begin?

Before the US adopted structured settlements, Canada was the first place to adopt them. The use of these payments was also influenced by the birth defects caused by the drug thalidomide.

The first structured settlements were issued in the US in the 1970s. In 1979, a ruling from the IRS stated that the taxpayer did not have a right to receive the monthly payments as long as the amount was invested.

The payments made to the injured party do not count toward the recipient’s gross income, and they are not subject to taxation. The popularity of structured settlements grew in the 1980s due to a law passed in the US. This prevented state governments from taxing the income from these payments.

In 1985, a trade group was formed to promote the use of structured settlements among injured claimants. In 1996, a law was passed that limited the types of personal injury cases that can be eligible for tax deductions. This law only allowed payouts from physical pain or suffering.

Over the years, over $10 billion in annual payments have been made to settle personal injury claims. Today, many claimants prefer to receive regular monthly payments instead of a lump sum.

How Are Structured Settlements Used?

The main differences between a lump sum and a structured settlement are the amount of money involved and the long-term financial security it provides. When people receive a lump sum, they tend to spend it quickly, which could rob them of the long-term security that comes with structured settlements.

While a lump sum can provide immediate wealth, it would be subject to taxation if the money wasn’t invested. Conversely, an annuity provides long-term income and tax-free growth.

Types of Structured Settlement Cases

There are many case types of structured settlements. The most common include the following:

Medical Malpractice

Sometimes, medical malpractice can be caused by doctors who do more harm than good. For these cases, patients and their families can sue.

Personal Injury

In a personal injury case, the injured party files a lawsuit to seek compensation from the person who caused their harm.

Workers’ Compensation

Most people know about workers’ compensation, which provides compensation for people who get injured on the job. The payments can be used to pay for medical expenses and wage replacement.

Wrongful Death

Sometimes, families can also benefit from a structured settlement by claiming that their loved ones died due to wrongful deaths.

Unassigned Cases vs. Assigned

Cases that are assigned are usually “qualified” and can qualify for tax benefits. In these cases, the defendant distributes the money to a third-party assignment company, which then purchases the annuity from the insurance company.

On the other hand, an unassigned case involves the defendant buying the annuity from a different insurance company. The person who gets the annuity is the named payee. In an assigned case, the insurance company that purchased the annuity is named as the payee.

Structured Settlement Payout Options

If you decide to receive a structured settlement, it’s important to determine if it’s right for you. You can start receiving the funds immediately or wait for a later date. The payouts can be beneficial if you need medical care or have lost your source of income.

You can also determine how long the annuity should be paid out and the number of distributions. Most people who receive a settlement will also need money for various expenses. If you find yourself in debt, consider seeking pre-settlement funding.