Structured settlement

Definition

A structured settlement is a financial arrangement in which a claimant receives periodic payments as compensation for personal injury or other legal claims, rather than a lump sum. This arrangement is often established as part of a legal settlement, allowing the injured party to receive tax-free income over time, which can be more beneficial than receiving a large amount upfront. The structured payments are typically funded through an annuity, ensuring a steady income stream to help with long-term financial needs.

5 Must Know Facts For Your Next Test

1. Structured settlements are commonly used in personal injury cases, workers' compensation claims, and wrongful death lawsuits, providing long-term financial security for claimants.
2. Payments from structured settlements can be customized based on the needs of the claimant, including options for increasing payments over time or specific payout schedules.
3. The tax advantages of structured settlements mean that recipients generally do not have to pay federal or state taxes on their payments, making them financially favorable.
4. If a claimant needs cash quickly, they may sell their structured settlement payments to a third party, but this often results in receiving less than the total value of the settlement.
5. Structured settlements are designed to protect individuals from spending their compensation too quickly and help ensure they have funds available for medical expenses and living costs over time.

Review Questions

• What are the primary benefits of choosing a structured settlement over a lump sum payment for claimants?
  • Choosing a structured settlement offers several benefits compared to a lump sum payment. First, it provides a steady stream of income over time, which can be crucial for managing ongoing medical expenses and daily living costs. Additionally, the tax-free status of these payments can lead to greater overall financial security. Structured settlements also help prevent claimants from depleting their funds too quickly, as they receive smaller amounts periodically rather than one large sum.
• Discuss how the customization of payment schedules in structured settlements can cater to different claimant needs.
  • The customization of payment schedules in structured settlements allows claimants to tailor their compensation according to their specific financial circumstances and future needs. For instance, a claimant might choose to receive larger payments initially to cover immediate medical expenses or living costs, followed by smaller payments later on. This flexibility means that individuals can adjust their settlement to reflect anticipated changes in their financial situation, ensuring better long-term management of their resources.
• Evaluate the implications of selling structured settlement payments for cash on demand and its impact on the overall financial health of claimants.
  • Selling structured settlement payments can provide immediate cash access for claimants who find themselves in urgent financial need; however, this decision often has significant implications for their overall financial health. Claimants usually receive less than the total value of their future payments when selling them to third parties. This reduction can jeopardize long-term financial security since they might end up with insufficient funds for future needs, particularly if unexpected expenses arise. Therefore, while selling may seem advantageous in the short term, it can lead to negative outcomes if not carefully considered.

Related terms

annuity: A financial product that provides regular payments to an individual over a specified period, often used to fund structured settlements.

lump sum payment: A one-time payment made to settle a claim, as opposed to the periodic payments seen in structured settlements.

settlement negotiation: The process through which parties involved in a legal dispute come to an agreement on the terms of a settlement, including whether to use a structured settlement.