Q: What is a Structured Settlement?
A: A Structured Settlement is an alternative to a lump sum cash payment in the resolution of personal injury, wrongful death or workers' compensation cases. The settlement usually consists of two components: an up front cash payment to provide for immediate needs and a series of future periodic payments which are funded by the defendant's purchase of an annuity policy or reinsurance from a life insurer who makes the periodic payments directly to the plaintiff.
Q: When is a Structured Settlement Appropriate?
A: It is most advantageous when the plaintiff requires funds over a period of time. Typical examples include:
- Plaintiffs who require continuing future medical expenses.
- Plaintiffs (or dependents) who require replacement of lost future income.
- Plaintiffs who require a secure lifetime tax-free income.
- Plaintiffs who are uncomfortable with managing money.
- Any case involving a minor, since courts usually will not allow payments to be made directly to the minor until he or she reaches the age of majority.
- Workers' compensation total disability or death claims.
Q: What Advantages Does A Structured Settlement Offer the Plaintiff?
A: There are two major advantages:
First, the Internal Revenue Service in Code Sections 104 and 130 provides for periodic payments in personal physical injury and sickness and workers' compensation cases to be tax-free to the plaintiff.
Second, a Structured Settlement prevents the plaintiff from squandering settlement proceeds. Studies show that most recipients dissipate their funds from a cash settlement within five years while their fixed financial needs continue.
Additional advantages to the plaintiff include:
- Receipt of a much larger amount of money than would be obtained in a cash settlement.
- Guaranteed regular payments.
- Competitive long-term returns on the settlement principal.
Q: Are There Any Advantages For the Defendant?
A: Yes, a Structured Settlement also offers:
- Earlier resolution of the case.
- Avoidance of the uncertainty and expense of litigation.
- Settlement of high exposure cases for severely injured plaintiffs with impaired life expectancy at a reduced premium-and with full lifetime protection for the plaintiff.
Q: Why are Payments to the Plaintiff Tax-Free?
A: Section 104(a)(2) of the U.S. Internal Revenue Code states that compensation for personal physical injuries or sickness - whether paid as a lump sum or as periodic payments - is excludable from the taxpayer's gross income.
Q: Who Purchases and Owns the Annuity Policy?
A: The defendant, the defendant's insurer, or the defendant's assignee purchases and owns the annuity policy. The defendant's ownership and control of the annuity policy is the reason the plaintiff receives tax-free payments, not only on the invested premium but on all interest income generated during the term of the annuity policy.
Q: What if the Insurer Should Default on the Payments?
A: Only very highly rated, financially secure life insurance companies are used to fund Structured Settlement obligations. In the unlikely situation that the life insurer should default on the payments, the defendant or the defendant's Insurer would be obligated to continue the payments. The obligation may be transferred to a third party via a "Qualified Assignment".
Q: What is a "Qualified Assignment"?
A: The Periodic Payments Settlement Act of 1983 (IRC 130) authorizes a "qualified assignment" of a defendant's obligations to make future periodic payments. This assignment is accomplished through a contract between the defendant of the defendant's insurer (assignor) and a third party, usually the holding company or a sister company of the life insurance company (assignee).
Once executed, an assignment removes the defendant or the defendant's insurer from the obligation to make future periodic payments and may give the plaintiff greater protection by replacing a relatively small defendant and/or its insurer with a large life insurance company, which then is obligated to make the payments.