Learn the basics about structured settlements and whether it’s right for you
What, exactly, is meant by a “structured” settlement?
A structured settlement is an alternate method of dispensing compensation to an injured claimant during settlement. If you choose to receive your settlement in the form of a structured settlement, you will not receive all of your compensation in the form of one lump sum payment but rather you will receive payments from your settlement in incremental amounts in fixed intervals over time.
More specifically, the structured settlement money paid by the insurance company is placed into an investment where it will grow with interest over time. The additional money earned from the interest eventually becomes part of the available funds available for settlement payments to the claimant. Therefore, the amount of money the claimant receives over time in a structured settlement is more than if one had received the same final settlement amount in the form of a lump sum.
As a general rule, structured settlements are important to consider in personal injury cases involving large settlements. At Scholle Law, our experienced and knowledgeable Georgia injury attorneys can advise you on your legal options regarding your settlement payment.
Continue reading for answers to the most common questions about structure settlements.
Structured settlement and taxes
A good starting point for understanding structured settlements and taxes begins with an understanding of the Periodic Payment Settlement Act of 1982.
Generally speaking, the view by Congress is that structured settlements are a good idea as they help to promote long-standing financial stability for the injured victims and their families. With the Periodic Payment Settlement Act of 1982, Congress implemented a list of tax regulations that encourage the use of structured settlements as an option. As a primary incentive, Congress classifies payments from structured settlements as exempt income or tax-free.
More information on the tax-free nature of structured settlements can be found by reviewing the Internal Revenue Code (IRC) Section 104(a)(2), which explicitly excludes compensatory damages from falling into the same category as gross income:
(a) In general, Except in the case of amounts attributable to (and not in excess of) deductions allowed under section 213 (relating to medical, etc., expenses) for any prior taxable year, gross income does not include—
(2) the amount of any damages (other than punitive damages) received (whether by suit or agreement and whether as lump sums or as periodic payments) on account of personal physical injuries or physical sickness
Structured settlement payment options
In a structured settlement agreement, you get to do the structuring. You have the freedom to design the payment plans of a structured settlement to suit virtually any personal preference you have.
For example, some may prefer to receive regular monthly payments over time with no other payment plans included whatsoever. However, others may want a large initial payment at first, and then regular monthly payments.
Some people get quite creative. For instance, some choose to put aside a designated lump sum for their daughter or son’s prom, graduation, or wedding. Others receive regular monthly payments but also schedule a single large payout to occur annually every Christmas. Where the settlement figure is large enough to substantiate the request, almost anything is up for consideration.
Do not be stuck on the idea of only receiving monthly payments. You have options.
Advantages of considering a structured settlement
Structuring promotes settlement
When an injury claim is negotiated toward a final settlement, both sides will discuss and debate the monetary value of the claim in question. Unfortunately, even the best efforts to settle a claim can end with severe disagreements over the value of the case. If there is no agreement, then the case will probably have to go before a jury for them to decide.
A trial is not an ideal option. Any experienced lawyers will tell you that there is never a guarantee of what a jury is going to conclude. Contrary to expectation, a jury may surprise everyone and conclude that nothing is owed. When it comes to a jury, you just never know for sure; therefore, it’s always better to exhaust all possible settlement options before taking the matter to an unpredictable jury.
But how might a structured settlement offer help resolve the claim?
Let’s look at an example:
Imagine that you and the attorney for the at-fault driver are at mediation trying to settle your claim. The insurance company for the at-fault driver has topped out at $500,000, but you have made it clear that you will accept no less than $1,000,000 to settle the claim. Normally, disagreements such as this end with the claim not being settled at mediation.
However, what if the insurance carrier reintroduces their offer of $500,000 in the form of a structured settlement?
In that case, the actual payout over time to you could come very close to, if not surpass, your final demand of $1,000,000. Suddenly, the settlement becomes a real possibility. You accept the offer and the claim is settled at mediation.
To be clear here, the insurance company did not pay out $1,000,000. Instead, the structured settlement funds totaling $500,000 were invested, causing the $500,000 to grow with interest over time, resulting in more money becoming available for you.
Structured settlements can include a lump sum payment
Normally, injured victims choose between a structured and a lump sum settlement (where they receive all of their money at once). However, it’s important to understand that structured settlements still allow a lump sum payment on the front-end. It just prevents you from having all of the settlement in a lump sum payment.
In a structured settlement, you can request that part of the settlement funds be given to you in a large payout on the front-end while the rest is given to you at regular intervals over time. All of the money must be paid into the investment initially, but the lump sum can still happen. Many people structure their settlement this way to pay off existing debts in order to have a new financial beginning and to enjoy the benefits of their tax-free monthly income debt-free.
In the context of a structured settlement, initial lump sum payouts are also useful for addressing immediate practical needs such as making a home wheelchair-accessible or purchasing reliable transportation. In other cases, there is no particular reason given for the initial lump sum payment. To put it simply, you just want it.
For some, a large lump sum payment upfront allows for a long-awaited time of financial enjoyment after an arduous legal battle with the insurance company. The choice is yours. It’s your money.
Structured settlements are guaranteed
The company responsible for issuing the annuity guarantees the payments. In the unlikely event that the company becomes bankrupt, the annuity is normally backed-up by either the state by way of a guarantee association or an association similar to the Federal Deposit Insurance Corporation (FDIC). This being the case, you have at least 2 levels of confidence that payments to you from your structured settlement will not be disrupted or altogether lost.
On the other hand, if you decide to invest your settlement money on your own, the return on your investment might not do so well. It is not guaranteed at all. In fact, it may go south quickly, resulting in you losing all your money before you know it. Given the guarantee supplied in a structured settlement, we think the saying “a bird in the hand is worth more than 2 in the bush” should be considered.
Structured settlements money is managed
Are you able to properly manage a large sum of money? Do others say you are good with money?
These are serious questions that require tough honesty on your part. We would all like to think that we are entirely able to manage large sums of money if only given a chance. But here’s the hard truth:
Not everyone is good at managing money.
Most of us have heard the stories of the man or woman who won the lottery, only to lose it all in a short period of time. Tragically, the same thing can happen to anyone who comes into a large lump sum of money after a personal injury settlement.
Getting a structured settlement is a good safeguard against any lack of money management skills. But remember, structuring your settlement doesn’t exclude the option of a large initial lump sum payout upfront. You can still request some of your money be paid to you as a lump sum right away without losing the benefits of regular payments to you over time.
Simply put, a structured settlement is a highly recommended option for individuals who are about to receive a large sum of money but lack the experience needed to manage it.
Structured settlements reduce expectations of other people
If you suddenly come into a large amount of money at once, the pressure to help your friends and family can become the new unexpected burden. For most of us, helping those in need is a very natural and admirable quality. But the truth is, you can’t help everyone. This being so, friends and family may begin to wonder why you were able to help this person but not the other.
What are you to do?
One way to preemptively avoid this problem is to structure your settlement. By doing so, you still get all of your money but avoid the perception to others that you suddenly came into a large sum of cash. Additionally, with a structured settlement, you can still be kind and generous without repeatedly chiseling away at your settlement funds. In a structured settlement, your money is protected and inaccessible until the next payment comes to you.
Also, when others come to understand that your money has been invested and is not just sitting in a bank account or a large drawer in your house upstairs somewhere, the frequency of opportunistic visitors might mysteriously decrease.
Structured Settlements are tax-free
Arguably one of the top benefits of a structured settlement over a lump sum payout is that the payments to you from a structured settlement are tax-free. As previously discussed, the Periodic Payment Settlement Act of 1982 passed a number of tax regulations — among which includes that the proceeds from a structured settlement are tax-exempt income.
Accordingly, not only is one’s regular income directly increased by virtue of the proceeds from the payment from the structured settlement, but it’s also indirectly increased again by there being no annual taxes owed. Add this to all the other advantages listed, and you have good reasons to consider structuring your settlement.
Disadvantages of structured settlements
You have less control over structured settlements
Structured settlements don’t allow you to have full control of your money. Your money is given to someone else to invest. You don’t get to choose where the money is invested or where it goes. However, if you receive all of your settlement money in the form of a lump sum payment, you are in the driver seat. Having access to all of your money at one time allows you the freedom to make your own investments how you see fit.
Additionally, if your settlement money is structured, you are not totally free to make large purchases when you want. In structured settlements, large sums of money are simply not available upon request.
Finally, some people just want their money and don’t feel like giving an explanation to everyone else. Like religion and politics, how someone spends their own money is often seen as a private matter and personal choice. If you want 100% control over all your money now, a structured settlement is not for you.
Structured settlements may also benefit the insurance company
In some cases, the liable insurance carrier will try to get you to accept a structured settlement and simultaneously promote that you use their investment company.
For example, if a fictional insurance company named Family Mutual Insurance wants to settle your case by way of a structured settlement, they might suggest that an investment company called Family Life (again, fictional) be used as the investment company. The request sounds reasonable given Family Life has an A+ rating and is backed up by another company in case Family Life goes bankrupt.
Then, you find out that Family Life is a subsidiary of Family Mutual. You discover that the guaranteed return on the investment over time is not only guaranteed for you, but Family Mutual as well. In short, because Family Life is part of Family Mutual, the insurance company not only lost no money, they made money for themselves off of your settlement.
For some people, this fact doesn’t matter. If they get the settlement they want, who cares if the insurance company benefits as well. For others who feel the insurance company has continuously mistreated them during the claims process, the last thing they want to do is help the insurance company make a profit off their injuries and misfortune.
If you want a structured settlement but don’t want the insurance company to profit off your injuries, you can simply use an unassociated investment company.
Structured settlements involve some (though minimal) risk
Sometimes it’s hard to believe that anything is guaranteed. When we hear that payouts on a structured settlement are guaranteed, we wonder how such claims can be made considering the threat of economic recession, inflation, and other opposing factors in our economy. Additionally, if the company responsible for the payout of your structured settlement goes bankrupt, you may have no way to recoup the money owed to you.
Typically, the best direction is to make sure that the investment company has an incredibly high rating and is backed by another company in the event the investment company becomes insolvent. All things being equal and normal, agreeing to a structured settlement with a high-ranking investment company that is backed up entails minimal risk. But as the old saying goes, never say never.
Naturally, if you allow an investment company with less than an A+ rating to manage your settlement funds, the chances of something bad happening increase.
Avoiding tricky structured settlements offers
Believe it or not, one of the sneaky tactics used by the insurance company when making an offer in the form of a structured settlement is to keep you in the dark as to how much is actually being paid to the investment company.
For example, an offer can be made in the form of a structured annuity with the final total payout over time being over $1,000,000. However, it’s important to realize that the insurance carrier for the at-fault party is not actually paying out $1,000,000 to settle the claim. Rather, the $1,000,000 is how much will be paid over time after the settlement money is invested. Usually, you have to explicitly ask the insurance company to unmask the amount of money being invested in order to know what the lump sum payment would be for that same offer.
In fairness, some insurance companies have learned that the potential for settlement is higher when all facts and figures are made known right up front. The relevance here lies in knowing the investment amount. If you are accepting of a structured settlement offer that equals $1,000,000 over time, then there is no foul.
However, insisting on knowing the investment amount can tell you how much is being paid out on the claim before any investing begins which, in turn, can signal to you if the insurance company has more room to move on their settlement offer. Once you know this, you can further debate the overall value of the claim and then revisit the possibility of structuring your settlement as a secondary matter. The more money invested in your structured settlement, the more money you will get over time.
Structuring settlements could make it harder to stay afloat financially in an emergency
Financial hardships and emergencies happen. For any number of reasons, a person can find themselves financially strapped. For those receiving regular payments from a structured settlement agreement, the culprit could be the result of poor money management and increased debt. Sadly, this is not uncommon, and it’s not always due to poor management. Sometimes things just happen. Sometimes it takes only 1 catastrophic event to spin one’s finances and life out of control, regardless of sizable monthly payments from a structured settlement.
When financial stress strikes, you may begin to want (or need) all of your settlement money right away. There are companies out there who know this and are willing to buy your structured settlement from you. Unfortunately, the amount offered to purchase your structured settlement is going to be very little on the dollar. While it’s true that you will receive a large amount of money from the purchaser after the sale, there is usually a tremendous amount of money you will have lost by comparison had you not sold your structured settlement.
We understand that the decision to sell your structured settlement is entirely personal. At the same time, we encourage you to weigh out all options before giving in. The emotional stress of being financially strapped can generate hasty decisions. This being so, make sure you seriously consider all other options first.
Most experts would agree that selling your structured settlement is not the best deal, but in the end the choice is yours.
Is a structured settlement right for you?
Deciding whether to receive your injury settlement in a lump sum or in the form of a structure is a decision every person must make for themselves. Ultimately, there is no wrong direction. There are advantages and drawbacks either way.
We recommend the following these guidelines for making your decision:
- Be honest with yourself. If you are not good with money, you probably shouldn’t have full access to all of your money at once. If you have not been good at managing your money in the past, having more money will probably not change this. Conversely, if you are known for being a financial wiz, take the money and run. You know what you’re doing.
- Do your homework. Research the pros and cons of each choice. Write them down in a notebook for easy access at a later date. Trying to remember the pros and cons by way of sheer memory is going to be less effective. No one can remember everything by memory alone.
- Make a decision. Thinking and research are good, but analysis paralysis is not. There is no such thing as a perfect answer. One way you can push through your indecisiveness is by listening to the experienced input from others on this topic. When you incorporate wise counsel with your own research, you will find yourself making a well-educated and informed decision.
If you need help deciding whether a structured or lump sum settlement is right for you, we encourage you to consult with the experts at Scholle Law. With more than 20 years of experience, our Atlanta injury attorneys can clearly lay out your legal options and help you make the smartest decision for you and your family.