Definition
A structured settlement is a financial arrangement where a person will receive payments over a period of time from a legal judgement or insurance claim. This is often used for personal injury or workers’ compensation settlements. The payments could be made for a set number of years or for the recipient’s lifetime.
Key Takeaways
- A structured settlement is a financial or insurance agreement where a claimant agrees to resolve a personal injury tort claim by receiving part or all of a settlement in the form of periodic payments on an agreed schedule, rather than as a lump sum.
- Structured settlements are a common outcome in legal cases where large amounts of compensation are awarded. They offer tax advantages and can provide a secure income stream for a long period, even for a lifetime.
- The periodic payments are typically funded by annuities, which are insurance products that guarantee a steady stream of income. However, the terms of structured settlements can be customized to meet individual needs.
Importance
The finance term “Structured Settlement” is crucial as it directly pertains to the management of significant sums of money that have been awarded to individuals in legal judgments or settlements.
Rather than receiving a large lump sum all at once, the recipient is given a series of scheduled payments over time.
This can help manage tax implications, protect the individual from quickly spending the money, and ensure long-term financial stability for individuals who may have ongoing medical or living expenses due to their legal situation.
Essentially, it provides a scheduled, reliable income stream, often for individuals who may not be able to work or earn income in the usual ways due to their discovered damages, thus making it a fundamental aspect in finance.
Explanation
A structured settlement is primarily employed as a means of compensation for injured individuals after legal cases, most commonly in personal injury situations. The chief purpose of structured settlements is giving the injured party(s) a steady and secure income stream over a stipulated period, which could be for a lifetime in some instances. When an individual suffers immense injury, especially when it results in a disability or long-term medical needs, a significant lump sum said at once might not an ideal solution.
A structured settlement caters to the injured party’s future needs by ensuring a regular and dependable money source, hence mitigating financial stress and supporting lifestyle adaptation to injuries and disabilities. Moreover, structured settlements offer significant tax benefits. In many jurisdictions, the periodic installments from a structured settlement are tax-free, shielding the recipient from heavy tax burdens.
This arrangement can be particularly useful in large settlements where accepting a lump sum could potentially bump the individual into a higher tax bracket. Furthermore, structured settlements provide an excellent tool for safeguarding the recipient from potential issues like poor money management, impulse spending, or falling prey to a scam. By providing a steady income over time, the structured settlement sustains the injured party and accounts for ongoing costs associated with their injury.
Examples of Structured Settlement
Personal Injury Cases: Typically, structured settlements are often used in personal injury cases. For example, if John was injured in a car accident caused by negligent driving of another individual named Bob, John could receive a structured settlement. Instead of receiving a lump sum payment, John would receive regular payments over a specific period of time from Bob’s insurance company.
Workers’ Compensation: If Sarah suffered a serious injury at her worksite that resulted in permanent disability, she might be entitled to a structured settlement from her employer’s insurance company. Rather than receiving a lump sum amount, she would receive periodic payments over a set number of years or for the rest of her life, depending on the terms of the settlement.
Medical Malpractice: Consider a case where a patient, Mark, wins a lawsuit against a hospital for medical malpractice. Mark and the hospital agree on a structured settlement, following which Mark would receive smaller, regular payments over a period of time, instead of a single, large payout. This allows the hospital to manage its financials better and ensures Mark has a steady income to take care of his medical needs.
FAQs about Structured Settlement
What is a Structured Settlement?
A structured settlement is a type of payment system where the compensation for a legal claim is paid out over a certain amount of time, versus in one lump sum. This is commonly seen in personal injury or incident cases where the payment could be quite large.
What are the benefits of a Structured Settlement?
Structured settlements can provide long-term financial security to the claimant by providing regular income over a set period. They can often be tax-free and provide protection against potential loss from bad investment decisions.
Can a Structured Settlement be sold?
Yes, in many cases, structured settlements can be sold, but this usually requires court approval. The sales process can sometimes be complex and the seller may not receive the full value of the settlement.
What are the potential downsides of a Structured Settlement?
While the regular income from a structured settlement can be beneficial, it may not be ideal for everyone. The funds in a structured settlement can’t typically be accessed in a lump sum, which could be restrictive for some people. Also, the amount received may ultimately be less than if the settlement was taken in a lump sum and invested wisely.
When should I consider a Structured Settlement?
A structured settlement is generally a good idea if you need regular income for a long time period, such as if you are unable to work. It can also be a good option if you are concerned about managing a large amount of money on your own. However, personal financial situations can vary greatly so it’s a good idea to consult with a financial advisor or legal professional before making this decision.
Related Entrepreneurship Terms
- Annuity: An investment that is made with an insurance company that guarantees a series of payments over time.
- Lump Sum Payment: A single payment of the total or remaining balance of a structured settlement.
- Present Value: Current worth of a future cash flow given a specified rate of return.
- Periodic Payment Schedule: A financial plan that outlines the timing and amount of each payment in a structured settlement.
- Settlement Agreement: A legal document that outlines the terms and conditions of a structured settlement.
Sources for More Information
- Federal Trade Commission (FTC): The FTC’s website offers consumer advice, including information on structured settlements.
- Internal Revenue Service (IRS): The IRS’s official website provides tax-related information about structured settlements.
- National Association of Settlement Purchasers (NASP): The NASP provides information about structured settlements from the perspective of the companies that purchase them.
- National Structured Settlements Trade Association (NSSTA): The NSSTA is an organization dedicated to the promotion of structured settlements and provides related resources on their website.
