Structured Settlement Annuity: What Is It?
Structured settlements offer injured victims a tax-advantaged way to receive payment. A structured settlement is a voluntarily reached arrangement between the injured party and the defendant for future recurring payments that has been supported by the US Congress since 1982.
The wounded claimant doesn’t get paid for their injuries all at once with a structured settlement annuity. Instead, the claimant gets a steady stream of tax-free payments that are specifically designed to cover future medical costs and necessities of life.
Structured settlements can be reached privately (for instance, in a pre-trial settlement), or they might be mandated by a court order, as is frequently the case in decisions involving kids.
What Sort Of Flexibility Comes With A Structured Settlement Annuity?
Structured settlement annuities are incredibly adaptable and can be created to suit almost any set of requirements. It is possible to create a fairly straightforward payment schedule that calls for equal payments at predetermined intervals, such as once per month for 20 years.
However, equal payments are not required at all times. To help cover the cost, a claimant who will require a new wheelchair every three years may choose to get a bigger payout every 36 months. Assumably in addition to the monthly payments, this
Structured settlement annuities are ideally suited to compensate claimants for a wide range of injuries because of their inherent flexibility.
Who Establishes the Schedule and Amount of Structured Settlement Annuities?
The claimant and defendant in any bodily injury lawsuit negotiate issues such the cost of the injured party’s medical care, daily necessities, and family needs. A settlement consultant, for example, is frequently hired by one side (or both) to provide calculations on the long-term cost of these requirements.
The wounded claimant might choose a periodic payment schedule that best suits his or her needs after the total damages have been agreed upon. Afterward, the defendant must consent to making ongoing payments through a structured settlement annuity. The defendant transfers the obligation to make payments to a third-party assignment firm, which finances the requirement to make recurrent payments using a life insurance company annuity.
The claimant should always speak with both his or her lawyer and settlement consultant because these concerns call for intricate calculations, precise wording for the settlement agreement, and the completion of the necessary paperwork.
Are There Cases Where Structured Settlement Annuities Are More Likely To Be Used?
Structured settlement annuities may be the best option in a variety of situations, such as:
those who are temporarily or permanently disabled;
instances of guardianship over minors or people who lack mental capacity;
cases of workers’ compensation;
wrongful death situations involving surviving spouses, children, or both;
circumstances involving severe injuries, especially when there are ongoing costs for treatment, support for the family, and living expenditures.
Which Has More Benefits Over A Lump-Sum Payment: A Structured Settlement Annuity Or A Lump-Sum Payment?
There are various benefits to a structured settlement annuity. Security comes first. A structured settlement annuity offers long-term income that is guaranteed*, enabling the injured claimant to heal without expending time and money on researching investment options. Regular payments may be tailored to the needs of the claimant.
A second benefit is monetary. Congress specifically stated that 100% of every structured settlement payment received on account of physical disability or illness within the definition of IRC 104(a)(2) would be free from federal and state income taxes when it altered the federal tax law to encourage structured settlement annuities. While the earnings from a lump sum injury settlement are tax-free, any interest that is produced if the monies are invested in a conventional investment may be subject to taxation.
There are numerous other advantages. For example, the claimant does not run the danger of misusing the settlement funds. According to figures from the insurance business, between 25 and 30 percent of all injured litigants totally spend their verdicts or settlements within two months of their recovery, and 90 percent of them do so within five years. (Source: California Practice Guide: Personal Injury, Flahavan, Rea, Kelly & Tener, The Rutter Group, Ltd., 1992, Ch. 4)
Finally, by assigning the risk to a trustworthy, knowledgeable financial institution through the use of a structured settlement annuity, an injured party can prevent the possibility of outliving their recovery.
*Guarantees are contingent on the issuing insurance company’s capacity to pay claims.
What Consequences Come With A Structured Annuity?
An annuity for a structured settlement has two key drawbacks:
Once established, the periodic payments cannot be changed, delayed, accelerated, or borrowed against. Because of this, it is crucial for claimants to collaborate with a skilled settlement consultant to decide on their unique approach.
Default risk is the possibility that the chosen life insurance provider won’t be able to cover the costs. However, because structured settlement annuities are employed by well-capitalized life insurance firms, this risk is minimal. To reduce the risk of default, settlement money might also be divided across a number of different life insurance firms.
What Are a Few Federal Tax Regulations That Benefit Structured Settlement Annuities?
Congress established tax regulations in the Periodic Payment Settlement Act of 1982 (P.L. No. 97-473), which were intended to promote the use of structured settlement annuities in instances involving physical injuries.
The Internal Revenue Code’s Section 104(a)(2) makes it clear that the injured party is exempt from taxes on the entire amount of the structured settlement annuity payments. In contrast, a lump sum payment’s investment earnings are often fully taxable.