What is a Structured Settlement?
Structured settlements arise when, at some point during settlement negotiations, the plaintiff realizes he doesn’t want an immediate lump sum of money, but, instead, would prefer to receive his recovery in long-term installments that can pay for future expenses, such as food, clothing, housing, transportation, medical care, etc. In response, the plaintiff’s attorney requests that, as a condition of settling the case, the defense fund a stream of periodic payments for the plaintiff; this is the structured part of the settlement. Generally, in addition to the structured portion of the recovery, there is a negotiated lump sum payment for attorney’s fees, associated costs, and medical liens, as well an initial cash sum for the plaintiff. Once the defense agrees to the terms of the periodic payments, it delegates the responsibility of making those payments to a highly rated life insurance company.
The ultimate purpose of a structured settlement is to provide care, ensure well-being and guarantee stability for the plaintiff by providing him with a steady stream of payments into the future. In fact, many plaintiffs opt to receive payments for the rest of their lives, so they can be rest assured that they will never run out of money. In addition to offering the security of guaranteed income, structured settlements protect against detrimental outside parties and wasteful dissipation.
Advantages of a Structured Settlement
When you receive a settlement for a personal injury case you receive the money tax-free. If you then take the money in a lump sum and invest it, you will then pay income tax or capital gains tax on the growth of that investment. The federal government allows personal injury victims to receive investment growth from a structured settlement tax-free (This is a benefit ONLY allowed for personal injury victims and wrongful death beneficiaries). (Structured settlement annuities must be purchased at the time of settlement of the case.)
- There is no market risk. The structured settlement is funded with an annuity which is one of the safest funding assets available. (The other would be U.S. Treasuries)
- Investment rate of return is comparable to other investment vehicles.
- There are no yearly management or administrative fees.
- At the time of death, remaining guaranteed payments are passed on to your beneficiary tax-free.
- Payments can be made monthly, quarterly, semi-annually, annually and even in lump sums paid in to the future.
- Funds in the structured settlement are immune from creditors. (Creditors are able to garnish paychecks and bank accounts but cannot garnish annuities.)
What are the Limitations of a Structured Settlement?
The terms of the payout are to be followed as set forth in the settlement agreement. This means that once the payment schedule is in place, the beneficiary cannot access any of the funds outside of the agreed-upon payment schedule, nor can the payment schedule be changed. If at a later time, the beneficiary would like to access her funds outside of the parameters of the scheduled periodic payments, her only recourse would be to sell her remaining payments. This practice is called factoring. However, it is not advisable as the beneficiary customarily receives only a fraction of what the annuity is actually worth. A sound financial plan should safeguard against the hazards of turning to a factoring company by addressing all future needs and wants at the time that the structured settlement is designed.
Plaintiffs are sometimes put in the position of depending on a structured settlement broker hired by the defendant or their insurance company. This can lead to many pitfalls for the plaintiff. Often the defendant and the insurance company have their own agendas when negotiating the terms of a structured settlement. Those agendas don’t necessarily consider the plaintiff’s best interests and they are rarely concerned with reaching the most favorable terms for the plaintiff.
What are some of the pitfalls that can arise when relying on a “defense broker”?
- The plaintiff does not receive the best benefits for his situation. Careful consideration and planning is important when planning for a lifetime of future needs, wants and events.
- The plaintiff does not receive the best rate of return. There are many life insurance companies that provide structured settlement annuities. All available providers should be considered when shopping for the best return rate.
- The plaintiff is not offered the most highly rated provider. Life insurance companies are rated based on their financial stability. So in certain cases, it is in the plaintiff’s best interest to split her settlement into multiple annuities with multiple life insurance companies. However, a defense broker may not present the plaintiff with this option or even give the plaintiff an opportunity to choose the most highly rated life insurance company for their particular case.
- The plaintiff’s interests may come second to the interests of the liability carrier. It is not uncommon for a liability carrier to place a plaintiff’s annuity with an affiliate life insurance company in order to allow the governing organization to profit from the plaintiff’s annuity. This practice prevents other—and, in some cases, better—life insurance companies from being considered.
- The plaintiff’s additional assets may not be considered. Important issues, such as estate planning and government benefits may not be considered by a “defense broker.” This can cause major havoc down the line for plaintiffs and/or their heirs.
How does a plaintiff avoid these pitfalls?
To ensure that they are receiving all of the options available to them, as well as the best possible care and planning for their futures, plaintiffs should always insist on having a Certified Structured Settlement Consultant on their side. CSSC (Certified Structured Settlement Consultant) is the highest designation in the structured settlement industry. It is the equivalent of hiring someone who is Board Certified in her field. Also, plaintiffs should make sure that, in addition to holding the proper certification, their CSSC is consistently dedicated to helping plaintiffs. Many consultants are hired by the defense but will work on the plaintiff’s side if they are asked. Often, however, these consultants maintain their allegiance to the carrier or defendant who hired them. To protect themselves and their interests, plaintiffs should do their homework by not only checking the consultant’s website but also asking for disclosures.