Structured Settlement Basics
A structured settlement is a legal settlement paid out as an annuity instead of a lump sum. Cases that commonly result in structured settlements include:
• Personal injury
• Workers’ compensation
• Medical malpractice
• wrongful death
Typically, structured settlements are used to guarantee a stream of tax-free payments for an injured party after a civil lawsuit. These payments can cover medical bills, long-term care or other needs. Opting for a structured settlement over a lump sum helps ensure long-term financial stability for the recipient.
Three parties are involved in a structured settlement case:
• The plaintiff is the individual who suffered harm.
• The defendant is responsible for the harm.
• The consultant ensures the terms of the structured settlement agreement are fair.
Need To Sell Your Structured Settlement for Cash Immediately?
How Structured Settlements Work
Yes, a structured settlement provides regular payments over a specified period. The frequency and amount of payments are determined during the settlement negotiation process.
Structured settlement payout options offer ample flexibility. During settlement negotiation, you can determine your payout structure based on your specific needs. For example, payments can begin immediately or at a later date. You can also negotiate the frequency of payments, each payment value and additional death benefits.
Structured settlements offer guaranteed income and protection against impulse spending. You also retain the option to sell your structured settlement in the future should you have an urgent financial need.
Potential downsides of structured settlements center on their inability to be altered after funding and the inherent lack of access to cash. Once your settlement terms are set, you cannot change them. And having locked-in, scheduled payments means you cannot access the settlement’s value.
How a structured settlement is handled during a divorce depends on the approach your state takes to asset division. States divide assets according to either ‘equitable distribution’ or ‘community property.’
If you live in a state with equitable distribution, and you received the settlement before you were married, it is likely you will keep the settlement. But if you live in a ‘community property’ state, then anything either spouse owned before and during the marriage is considered property of the union and can be subject to division.
In any state, the division of assets doesn’t mean the settlement check itself gets divided. Typically, the spouse who doesn’t keep the settlement will get a different asset to balance out the overall division of assets. If you have a settlement and are facing divorce, you may want to hire a lawyer or mediator with experience handling complex assets.
A relative received a structured settlement after a car accident. When weighing the pros and cons of keeping the settlement versus selling the settlement, she was not aware of other options besides keeping the settlement. My relative, like many others who receive a structured settlement, was not aware of all options that were available with a structured settlement.
Selling Your Structured Settlement
Yes. The United States government passed several laws, including the Periodic Payment Settlement Act of 1982, that mandate court approval for the sale process. Court approval laws are still being updated today to provide further protection.
Before the structured settlement industry was regulated, some factoring companies took advantage of people who were not informed of the nuances of selling their structured settlements. Mandating court approval ensures the sale is in the consumer’s best interest and that a factoring company is not taking advantage of the person’s ignorance.
No. There are several options for selling your structured settlement payments, including selling just some of them. This is called a partial sale. Each person’s situation is unique, and regardless of how much of your settlement you want to sell, a judge has to approve the sale. You should discuss your options with your accountant or attorney before choosing how much to sell.
Most times, no. Because of the Periodic Payment Settlement Act, the amount you receive from a sale to a purchasing company is not taxable. However, some exceptions apply.
Factoring companies typically charge a discount rate between 9% to 18% on the sale of structured settlement payments.
It generally takes 45 to 90 days to sell your structured settlement. However, the availability of the courts and errors in your documentation could delay the sale.
Interested in Selling Annuity or Structured Settlement Payments?
Pre-Settlement Funding for Structured Settlements
Pre-settlement funding gives you access to funds before you’ve finalized your lawsuit. You can apply for pre-settlement funding from a firm that specializes in granting cash advances to plaintiffs in pending lawsuits. Plaintiffs often use this money toward court costs.
If approved, you can receive between 10% to 20% of the amount you’re expected to win from your case.
No, most pre-settlement funding companies don’t check your credit score when checking to see if you qualify.
Get a free, pre-settlement loan quote
Inheriting a Structured Settlement
Structured settlements are generally paid through annuities held and administered by insurance companies. The person awarded the settlement can designate a beneficiary to receive the payments if they die before the payout is finished.
Whether a structured settlement can be inherited depends on whether the annuity contract specifies life contingent payments or guaranteed payments.
Life contingent payments last only through the lifetime of the person awarded the settlement. If that person dies, the insurance company does not send future payments to their beneficiaries.
If you are the named beneficiary of a loved one’s structured settlement and they have passed away, submit a claim to the annuity issuer so the rest of the agreed payments can be disbursed to you. The money from a qualified structured settlement will continue to be exempt from income taxes even after it has been inherited.
A structured settlement may have a commutation rider included in its contract. This means all or some of the future payments are converted into a lump sum of cash for the beneficiary when the settlement is inherited. A commutation rider can simplify inheritance. Without a commutation rider, a beneficiary must go through the process of selling their future payments to get access to cash sooner than scheduled.