Structured Settlements Help - Everything You Need to Know
This site was designed to educate and answer any questions visitors might have had regarding structured settlements.
Content is from the site's 2005 archived pages.
Structured Settlements – What are they?
It is a financial award given to someone that sustained injuries in an accident typically paid by an insurance company. Rather than one large payment and structured settlement is an annuity that pays the recipient out over time. The purpose is to provide ongoing income for someone that may not be able to work so that they can meet their financial obligations over the many years. Payments are often paid monthly or quarterly and can last up to twenty, thirty years or more depending on the case and situation.
Why Settlement Recipients Sell?
The most common reasons people transfer their future payments for cash include:
1. Their life or financial circumstances have changed
2. To pay mounting bills
3. Other reasons include: divorce, to pay for college, or a down payment on a house
A structured settlement can offer several advantages including the security of long-term income being guaranteed. If the injured party is unable to work due to their injuries this provides them income to pay their bills and get any need medical care. It also serves as a way for one to manage their settlement and ensure they will have money to meet their ongoing needs several years in the future. It also enables the injured party to focus on their recover rather than money management.
There are statistics that show that up to 30% of those that receive a lump-sum as their settlement spend it within the first few months and upwards of 80% have spend the money within five years.
If one chooses an lump sum payout from the onset the money needs to be invested and administered. Unless the injured party or their family has money management experience they will need to hire a quality financial advisor to invest the award to ensure it will last for many years to come.
The income from a structured settlement is tax free, both at the Federal and state levels. Because the money is handed out in smaller increments there is less need to for a financial advisor as the payments are set up to meet your monthly needs.
Structured settlements are often ideal under the following circumstances:
- Workers compensation cases where the injured party is unable to work for a protracted length of time. A structure will allow steady income to insure that the victim and their family will continue to have steady income.
- Disabilities of a temporary or permanent nature that require extensive health care or recovery time.
- Guardianship cases where the injury results in death of someone with minor children. A structured settlement can insure that funds are available for the surviving family members.
There are many things to consider if you are in a position to receive a large amount of compensation for injury or accident. One of the options may involve payments over time. Before you act, you should learn as much as you can about structures in order to determine if such an agreement is right for you. As always, should you find yourself in such a situation, you should consult with a financial advisor and/or a competent attorney. The last thing you want to do is deal with a crisis without adequate help.
If you have a structured settlement and are considering selling, read on to learn more or contact us via our “ask the experts” page or call us for personalized assistance.
It will be helpful while navigating this website and learning more about settlements to know the most important terminology used in the industry. Some of the more important definitions are below. If this site does not answer you questions or if you want a definition explained to you please email us at
email@example.com We are happy to answer your questions and put you on the right path for whatever your particular issue is.
Factoring Company – This is a company that purchases future payment or annuity streams and provides the seller lump sum cash.
Structured Settlement – Financial settlement for someone injured in an accident – rather than being paid out in cash they receive a settlement that is structured to make recurring payments over many years to help the recipient meet their long term financial obligations.
Annuity – A settlement is set up by purchasing an annuity that will then make payments to the recipient over the term of the agreement. The annuity is purchased by the insurance company that presented the offer of a settlement is managed by a second (non-affiliated) insurance company. Payments are made at regular intervals typical monthly, quarterly or annual as stipulated in the original terms of the agreement.
Primary Market – The primary market are companies that help injured parties to set up a structure based on the offer of the settlement by the insurance company. The goal is to take the full amount and space out payments in such a way to meet monthly financial obligations over a long period of time (ten, twenty years or more).
Secondary Market – These are factoring companies (see above) that help those that have a settlement and want to cash in their payments for cash. They are the buyers.
This website will set up a Frequently Asked Questions section but some of the more important questions are below. If you have a question that is not answered here or on the site please submit your information on our form above or the you can email us as well and we will answer you question promptly.
Can I sell my settlement – The short answer is yes. Based on the definitions above there is an entire industry that was set up to meet the needs of those that are receiving payments from an annuity and want/need a larger sum of cash. You can cash out your payments.
Do I have to sell all my payments: No – the good news is you have flexibility to meet your needs based on your wants and financial situation. You have the option to sell all your payments at one time or sell only some payments. If you sell on some payments you can get a lump sum today and keep some of your future payments intact. The amount of payments you sell is totally up to you but should be considered carefully so you cash in the right amount.
Can I do more than one cash out transaction: Yes, it is certainly possible and done fairly routinely. Although this is often done by those that mistakenly do one cash out transaction and sell too few payments. So it is important to consider the amount of cash you need today and any future need you might have so you can try to do only one transaction. But the option to do a second or third transaction is possible.
Benefits and Drawbacks of Annuities
As with any financial arrangement, there are benefits and drawbacks to structured settlements. Anyone with a serious injury who requires long-term medical care who is considering such a transaction should become familiar with the advantages and disadvantages of a structured settlement before entering into any sort of agreement.
The advantages of a structured settlement over a lump sum payout are numerous:
The are Tax Free - As of 1982, structured settlements are tax free, both at the local and Federal level. Lump sum payments can be tax free, but the investment income generated by them is not. If you have concerns about taxes or having to keep up with tax matters caused by interest or investment income, then a structured settlement might be best for you.
They provide additional security - Many people who suddenly obtain large amounts of money, such as those obtained in a lump-sum payment as a result of a personal injury or accident, may suddenly find the world knocking at their door, as long-lost poor relatives, salesmen and con men are always interested in people who are suddenly flush with cash. This is not an issue with structured settlements, as the cash flow is steady but smaller. In addition, there are fewer worries about investing money, both in terms of where to invest it and in terms of whom to trust with the investments. The beneficiary of an annuity-based payment need not worry if a downturn in the stock market will affect their future health care needs, or worry if the investment advisor they hired is scheming to take all of their money.
They can save money - Settlements of this type are often arranged out of court, saving both parties the time and expense of accident litigation, which can often drag on for years with lawyers taking a large portion of any lump sum settlement. The costs of not going to court can be substantial, which leaves more cash available for the long-term care of the injured party.
They are flexible- Depending on the needs of the injured party, the payment period can be for five years, ten years, twenty years, or even a lifetime. If there is a recurring expense every two years, the payments can be structured to meet that every-other-year expense.
The advantages of a structured settlement probably outweigh the disadvantages, but anyone considering such a settlement should also be aware of the downsides associated with them:
Structured Settlements cannot be changed - Generally, once you agree to accept an annuity, you cannot trade the annuity back for a lump sum payment. Structured settlements have special tax considerations. Once such an agreement is reached, you are stuck with it, for better or worse.
Structured Settlements do not pay interest - The interest is built in to the payments; that’s how an annuity works. On the other hand, the payments are tax free, and you can certainly invest any unspent portion of your payments and collect interest on that sum.
Long term payments may not be used as collateral for a loan - The laws that establish how these arrangements work are designed to protect the injured party from abuse. Placing the payments as collateral would place the financial agreement at risk, and that is not something for which they were designed. You may, however, declare your payments as income, and use that to apply for a loan.
This type of payment solution is not for everyone. If you want to pay cash for a big house using your settlement money, you may wish to take a lump sum payment instead. Once you agree to accept payments over time, you are obligated to continue. On the other hand, the amount of money you receive may be greater than if you accepted a lump sum payment, particularly if your payments are for life and you have the good fortune to live a long time.
You should see a qualified attorney if you are injured and are seeking compensation.
Selling your structured settlement
At some time during the period you are being paid for your structured settlement, you may decide that you wish to sell it, or you may be approached by a company that is offering to buy your settlement. Can you sell your structured settlement? How much will you receive?
The value of your settlement was determined by a number of factors - the amount of time you are to be paid, the severity of your situation, and the expected rate of inflation over the months or years you will be paid. The party that is paying you is purchasing an annuity, and the amount that they pay up to establish that annuity is but a fraction of the amount you will receive over time. That money is invested, and the interest it accrues over the years allow it to grow large enough that it might have a series of monthly or annual payments withdrawn.
Once you agree to accept a structured settlement, you cannot exchange it for a lump sum payment, nor may you use your settlement as collateral for a loan. What if you want to buy a home and pay cash, or you have some other unexpected large expense?
Under certain circumstances, you may be able to sell your structured settlement. There are investors who are interested in purchasing structured settlements, lottery winnings, and other annuities. Perhaps you have been contacted by one of these agencies.
The laws regarding the sale of structured settlements vary from state to state, and there are Federal laws that affect their sale, as well. You will probably have to go to court to arrange the sale, and some insurance companies, who handle the annuities that fund structured settlements, will not assign them to a third party.
Even if you do decide that you would like to sell your structured settlement, be aware that the amount that you are likely to be offered for your payments will seem quite small. If you take the amount of money you receive annually for your settlement and multiply it times the length of time you will be paid, you will come up with a total value for your settlement. Keep in mind, however, that your payments have been funded through the creation of an annuity that earns interest and grows over time. The value of your settlement in present-day dollars may be half of the total value or even less, depending on how the payments were calculated and structured.
Any party that offers to buy your annuity is interested in doing so for investment purposes. They wish to make money on the transaction, and for them, that profit will be spread over the long time that it takes to receive all of the payments that constitute the settlement. Once you combine the factors of time, interest, inflation, and the buying party’s profit, you will find that the offer made to you will seem quite small.
Still, you might be interested in accepting it, as the lump sum offered may allow you to take care of your present needs more readily than continuing to accept payments over time. Be aware that there may be tax considerations in selling your payments, and due to state laws and the policies of the insurance company that handles your annuity, it may not even be possible for you to sell your structured settlement.
If you decide to sell, discuss it with your attorney. You will need to go to court to facilitate the sale. You should also shop around, as different companies may offer widely different amounts for your settlement. Beware of scams; one of the reasons you’ll want an attorney is to make certain that you actually get paid for the transaction.
You might also wish to contact the National Structured Settlements Trade Association. The NSSTA is a trade association that deals specifically with these sorts of arrangements. They may be able to offer additional information regarding the specifics of selling.
About Structured Settlements
The Periodic Payment Settlement Act of 1982, passed by Congress, amended the Federal tax code to recognize and encourage the use of structured settlements as a payment solution in personal injury cases.
Prior to this, damages paid due to lawsuits stemming from accident, injury, or workmen’s compensation cases were generally paid as a lump sum; the injured party received all of their payment at one time. This required that the injured party not only adjust to living with a disability, but also to adjust to having a large sum of money.
Even if you do not have a crippling injury, it can be a burden to suddenly be presented with a large sum of cash. The money must be invested, and invested wisely. If you cannot or will not administer the sum yourself, then you must find someone to do it for you. A friend? A relative? A stranger? Can you find someone honest to make this money work for you? Often, these situations did not work out well, and many victims of personal injury or accident found themselves penniless after just a few years, when their settlement was intended to support them for life.
The structured settlement came about as a result of too many people being awarded large sums, only to find themselves poor and unable to take care of themselves as a result of careless spending, unscrupulous investors or greedy relatives.
In a case involving physical injury and a suit involving a responsible party, an annuity system may be negotiated as an alternative to a lump sum payout for taking care of the victim’s long-term needs. The responsible parties will meet to discuss what the victim needs in terms of care or assistance, and to determine the length of time, anywhere from a year or more to life, that the victim will need financial assistance. Once a present-day value is determined, a or a representative of the insurance company that will facilitate the payments will perform the necessary calculations to determine the long-term value of the payments. The party that pays the damages will then purchase an annuity to fund the agreement. From this annuity, the injured party will receive their stream of payments.
Some types of injuries are well-suited to long term payment plans; others work better with a lump sum payout. Annuity plans are ideal for situations where the injured party will be incapacitated for several years or perhaps their lifetime, or when they will require long-term medical care. Such a financial arrangement might have worked well for Terry Schiavo. Mrs. Schiavo, a resident of Florida, was in a hospice and unable to care for herself for fifteen years. She received a lump sum payment for the negligence that led to her chronic vegetative state, but a structured settlement might have provided a better solution. Structured settlements are particularly useful in cases where the guardians or parents of minor children are injured or killed, leaving the children without adequate financial support or funds for their education.