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How Do Structured Settlements Work?

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Structured Settlements are one of the most popular ways for people to receive compensation. A large sum of money is split into smaller sums and paid over time. This is usually money from lawsuits, medical malpractice suits or wrongful deaths. Here's everything you need to know about a structured settlement.

Starting the Process

In order to qualify for a structured settlement, a court has to decide whether the people you're suing are at fault. Sometimes a company might suggest a structured settlement to avoid a trial but a judge can also award.

The defendant and plaintiff will agree on the settlement with an assignee. There are also discussions about if the payments are fixed, or if the plaintiff will receive larger sums at certain times. The defendant is also responsible for paying for the plaintiff's annuity.

Annuities and Payments

Annuities are guaranteed payments which are set up through insurance companies. They are paid over time and are safer than a company setting up payments themselves. The annuity contract matches the settlement requirements but once they're in place, nobody can change them. In some cases, plaintiffs can take a lump sum from the original settlement to donate to a fund or pay for immediate costs of healthcare.

The life insurance company will pay the money directly to the plaintiff according to the terms of the agreement. For example, if there's a set yearly agreement then of $10,000 then it will be released until the agreement has ended.

The Benefits of Structured Settlements

There are many benefits structured settlements offer and many people choose them over a lump sum.Structured settlements can earn interest over time, but they still don't count for tax purposes. Any income from a structured settlement is disregarded when calculating eligibility for social security benefits.

There's security in knowing that you're guaranteed a set amount of money each year or however you choose the schedule to be arranged. It also encourages you not to overspend and stick to a budget.

Payments don't have to start immediately. They can be deferred for a number of years so they offer a lot of flexibility.Structured settlements earn interest, so they often become worth more than a lump sum.

Things to Consider

While a structured settlement offers many benefits, there are also some important things to consider before entering an agreement.

The terms are finalized and then the plaintiff has to accept them. They can't be changed at a later date, so it's important to ensure you've agreed on a suitable schedule.

In some cases you can access funds early, but you'll pay a lot of money in surrender fees. Some agreements stipulate that the plaintiff must reach a certain age before they receive payments.

Some insurance companies don't disclose their administrative fees so you could end up losing a lot of money from the settlement. Always ask about fees before choosing a company.

Further Information

If a structured settlement is being set up for a minor, then it's advisable to ensure the settlement is kept for when the child is older.

Entering into a structured settlement agreement can offer you long-term financial security, but some people prefer receiving a lump sum. Ultimately it's your decision but while a structured settlement has rigid rules, it's ideal for families. A lump sum is easy to spend, but many take advantage of regular payments which are set up on their own terms. Always make sure you use a reputable company to offer support and advice through the process.