How structured settlements work

A structured settlement is usually connected to a personal injury tort claim. The defendant will settle for a large amount of money and instead of paying this amount to the plaintiff in one lump sum, it will be split up into periodic payments. It is often called a period payment judgment. The structured settlement guarantees future payments by purchasing annuities. The plaintiff is able to select how and when they want to receive their money. Some people choose to get installments each year for several years while others will receive lump sums every other year.

How a structured settlement works
Most individuals that are involved in a structured settlement have been involved in a tort law case. They are suing their insurance provider or another person for damages. Instead of taking the case to court, the defendant and plaintiff agree to dismiss the case. In return for the dismissal, the plaintiff will receive periodic payments over a set amount of time. The insurance company or the defendant will have a long-term obligation to pay the money to the defendant. Since this is a large amount of money, the defendant normally purchases annuities to pay for the structure settlement. The annuities are usually purchased from a life insurance company or they will delegate the payment arrangement to a third party, also known as an assigned case. If the company chooses to delegate the funds through annuities, they much exactly match the amount and time frame that has been chosen by the plaintiff.

Companies that delegate the funds, or use an assigned case, want to wipe their books clean of the case. They do not want to have a long-term payment plan on their accounts so they turn it over to another company. The assignment company will need to pay all the money to the plaintiff according to the agreement they made with the defendant.

The benefits of a structured settlement
The largest benefit of a structured settlement is tax avoidance. Depending upon the way you set up your structured settlement, the money could be tax-free or your tax obligations could be relatively minor. Another large benefit to a structured settlement is protection from having the funds dissipated. This can help individuals that need the money to pay for future medical costs.

A structured settlement can also help you keep your money longer. Instead of receiving one lump sum and spending it immediately, you will receive money periodically throughout your lifetime. If you lose your job or have other problems, this can help you because you will have a guaranteed income.

Structured settlements can help individuals that need constant care due to the accident. If someone was disabled as a direct result of the accident, they will be able to establish a special needs trust. This is similar to a structured settlement, but the individual's guardian or conservator will be able to control the money and they will make sure it is properly spent on the injured person.

The disadvantages of a structured settlement
While having your money spread out over a lifetime sounds enticing, it may be difficult for individuals that have medical costs they need to pay now. It can also be hard if you want to use that money to purchase a new home or pay off some student loans. Since you will not get all the money at once, you have to properly budget your accounts and plan on big purchases when you have received enough of the money from the structured settlement. You do not have the ability to borrow against the structured settlement, so you need to think carefully about the agreement before you sign on the dotted line.

You also cannot gain interest on the money you receive from a structured settlement. If you receive the money as a lump sum, you can divide it up and invest it and double the money over time. If you don't receive it as a lump sum, you will not have a long-term return on the money, only on the amounts you are able to invest when you receive your payments.

Once you agree to the terms of a structured settlement, there is no going back. You need to have a good lawyer at your side when you sign the structured settlement to make sure you are getting a good deal. They also know about the tax advantages and can help you agree to a structured settlement that is tax free.

What you need to know about structured settlements
Even though it may be nice to have a guaranteed income for a set number of years, you really need to look at your financial future and decide if a structured settlement is right for you. First, take a look at the commission money the insurance company will make off the annuities. Several insurance companies have established partnerships with these firms so they don't end up losing all of their money to you. They will get a large commission when they set up the structured settlement using annuities. If you are agreeing to a structured settlement with annuities, make sure that the insurance company will not receive any money from it.

Second, watch out for pushy lawyers and insurance companies. Some companies want to sign you up for a structured settlement because they know they will lose more money if you take the case to court. They will overstate the value of the structured settlement and they will try to get you to agree to it in a short time frame. This is because they don't want you to take time to research it and discuss it with your lawyer and tax advisors. If the value is overstated, you could wind up with a lower amount than you thought you were agreeing to. Always look over the paperwork and make sure everything is correct before you agree to it.

Third, use a good lawyer. Some lawyers have arrangements with the insurance companies and they may be getting a good chunk of your structured settlement. If your lawyer seems too pushy or they are not interested in your concerns, find a new lawyer. Watch out for a lawyer that tries to overtake you and signs you up for a structured settlement without consulting you first. Generally these lawyers will get some money from the annuities and they want to get the case closed before you are able to talk to a tax advisor or another lawyer. Always ask friends and family members for lawyer referrals before you select one from the yellow pages or before you hire the one that called you about your case. Unfortunately there are a lot of lawyers out there that browse the newspaper and police scanners for accident victim's information. They will call up these people and tell them they have a case against the insurance company and they will try to get them into a structured settlement plan as soon as possible. Do not hire the lawyer that contacts you because they are trying to make a profit off of your misfortune.

Fourth, understand the extent of your injuries. If you have life-long injuries, you may need to consider having a lump sum instead of a structured settlement. This is because your life expectancy is shorter and you could end up losing money if you pass away before you receive all of your structured settlement payments. Speak to your doctor before you contact a lawyer and find out how much it will cost to treat your injuries and how long they expect you to live. If they predict a short amount of time, agree to a shorter structured settlement plan.

Fifth, understand how much money you are entitled to. If you are going to have a large settlement, consider using multiple insurance companies. You can divide the money up among those companies and you will be protected if one of the companies declares bankruptcy. This means, if one of the companies defaults, you will still receive your money from the other companies.

Sixth, determine if you can increase the money by investing it on your own. If you can control your spending, take the lump sum and invest it. You can double the amount you were awarded if you are a smart investor. If you take the money in a lump sum, you can earn interest on it if you invest it. If you choose a structured settlement, you won't be able to earn interest money.

Seventh, think carefully about your future. Depending upon the extent of your injuries, you may need to use all the money for medical payments. If you have minor injuries and you were awarded with a large amount, decide how you want to use this money. If you want to buy a home or invest it into a large purchase now, you need to agree to a lump sum instead of a structured settlement.

Eighth, once you sign the dotted line its final. Once you agree to a structured settlement, you cannot change it. This is why it is important to have a good lawyer and tax consultant on your side before you agree to it.