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Frequently Asked Questions About Structured Settlements

Answers To Your Questions Structured Settlements

It does not matter if you are just learning about structured settlements or have been involved with them as an investment, insurance policy, or court-ordered award for a personal injury, you probably have questions. Once you learn the basics, structured settlements are actually easy to understand but because questions are common, we wanted to take this opportunity to answer some of the most asked questions about structures settlements, which could be used as a reference.

• What are the different definitions of a structured settlement?

First, structured settlements are cash payments made through an annuity system established to compensate a person who experienced a personal injury. Second, structured settlements are insurance policies that can be purchased from an insurance or financial company as protection should personal injury occur. Third, structured settlements are a type of investment whereby funds would be set up in a managed annuity account.

• In what situations are structured settlements used?

Actually, structured settlements are designed for a variety of reasons such as:

• Serious injury whereby long-term medical care would be needed, and living expenses and future medical costs would need to be covered

• Injury on the job that may or may not be work-related but would still be deemed a worker's compensation case

• Temporary or permanent disabilities requiring long periods of recovery

• Wrongful death cases involving a surviving family member that needs replacement income for the lost parent or spouse

• Cases requiring guardianship of minor children or an incompetent person due to an emotional, mental, or psychological disability

What are the primary benefits of a structured settlement?

The list of benefits for a structured settlement is long but the following are a few of the primary ones.

• Ongoing income that is 100% tax free

• Security knowing that scheduled payments in an established amount of money would be received in a timely fashion

• Zero concern over investment strategies or lack of good planning for the future

• Negotiation power for a negligent person or company whose actions resulted in personal injury to another person

What is the Periodic Payment Settlement Act?

The Periodic Payment Settlement Act was passed by Congress in 1982, which meant that structured settlement cases associated with personal physical injury would be legally recognized. Under this law, it became legal for people to be encouraged to use structured settlements because of the tax-free benefit. Additionally, under this Act, people would be allowed to benefit financially from structured settlements, courts could offer structured settlements as awards when potential for proceeds of a lawsuit to be abused, and people would have protection from potential risks of taking out a lump sum settlement.

Can a structured settlement be used as collateral for a loan?

The answer to this question is no. The reason is that structured settlements were developed for specific purposes, primarily as protection from abuse. Therefore, using a structured settlement as collateral for a loan would defeat the purpose for which it was designed.

Do structured settlements earn interest?

Again, the answer to this question is no. Instead, any interest would be included in the structured settlement agreement, making the actual settlement 100% tax free.

Is it better to accept scheduled payments over a long period or one lump sum of money?

Although there are rare occasions when taking out a lump sum makes more sense than receiving scheduled payments, experts strongly discourage people from taking all the money at once. Numerous reasons for this recommendation exist but the one at the top of the list is that fees charged by companies that provide lump sum payments are extremely high. Therefore, the amount of the settlement would be greatly decreased.

Why do people receive only a percentage of the gross proceeds?

The reason is that when a structured settlement is purchased through an insurance company or financial company, the issuer takes on some level of risk due to inflation. Because of this, as well as the insurance or financial company selling structured settlements to make money, it means that payouts would be less than actual face value.

What is the guarantee for rate of return on structured settlements?

For rate of return, structured settlements grow at a guaranteed fixed rate of return, which would not be affected by huge market fluctuations. For this reason, the rate of return for structured settlements would be greater than the majority of other fixed income investments. This along with structured settlements being tax free means as an investment, they outperform other investments within the equity market.