How does a structured settlement for personal injury differ from a settlement or award?
A settlement or judgment for a personal injury claim may be paid to the claimant by the defendant or the defendant’s insurance company in a single lump sum payment. The majority of settlements are paid in this way.
But in cases where the claimant (plaintiff) settles or is awarded a large sum of money, they may elect to receive all settlement funds in steady payments or a one-time partial disbursement of the settlement funds with recurring payments disbursed over a period of years or decades. This is called a structured settlement.
An initial partial disbursement of a structured settlement can and should be used for immediate expenses including, but not limited to medical bills, medical devices, convalescence, therapy, career training, special housing and transportation requirements or any other necessities unique to the injured person. The remainder of the partial disbursement may be invested or posted to a banking account to be used for living expenses or unforeseen future necessary expenditures. After the bills are met, the claimant is free to decide what to do with the remaining partial disbursement of funds.
Advantages to structuring your settlement over time
Some studies indicate that recipients of very large lump sum settlements or “windfall” awards frequently run out of the funds necessary to sustain their disabilities throughout the remainder of their lives. Sadly, this scenario may occur when the parent or guardian of an injured child lacks the experience of managing a large sum of money. One of the advantages to a structured settlement distributed over a period of years is the economic security and well-being of the disabled or partially disabled person.
There are also tax advantages to structuring your settlement. Although settlements and awards for physical injuries are generally tax exempt, interest and dividends earned on the investment of a single lump sum asset is taxable. Even if all of the funds received in a structured settlement are invested, the annual tax obligation would likely be lessened due to a reduced investment stream.
Will I make decisions regarding the distribution of my structured settlement?
A structured settlement is funded by way of an annuity purchased by defendant for the behalf of the claimant. When you agree to settle your lawsuit by way of annuity, your personal injury lawyer will facilitate a consultation with a qualified economic and financial analyst who will calculate your monthly or annual financial needs against mortality and inflationary tables. A qualified and trusted financial advisor will discuss your goals and the options available to you, i.e. the sums you wish to receive and the length of time over which you may extend your payments. You may choose to end disbursement of your funds at a designated age, terminate payments upon your death or continue with payments made to your heirs through the remaining life of the financial instrument. You may even elect to withhold regular payments until you reach a certain age to fund your retirement.
Why do insurance companies offer annuities to injured parties?
Because funds are invested in an annuity (a financial instrument that is expected to grow over time) the initial investment made by defendant or defendant’s insurance company is significantly less than the totality of the expected future income stream received by the claimant. Unless the claimant wishes to make a large purchase, such as a home, from a lesser settlement, say, for example, a settlement of $100,000., a structured settlement can be a win-win situation for both parties.
The Structured Settlement Purchasing Industry
The Washington Post recently published a story exposing a predatory company that took advantage of a young adult woman with brain damage and limited mental capacity due to lead paint poisoning as a child. The Baltimore woman had prevailed in a suit filed on her behalf and was tricked into transferring her monthly checks, 420 payments through the year 2052. The estimated value of her annuity was more than a half a million dollars but she transferred her future security for a mere $63,000.
Although most settlement purchasing companies operate legally and within the boundaries of the law, you should understand that the players within the industry will only offer pennies on the dollar for the transfer of an annuity. People who have fallen on hard times or who need a chunk of money to purchase a car or make a down payment on a home may be more easily persuaded to sell the remaining life of their structured settlement. However, Indiana Code 34-50-2 entitled Annuity Structured Settlements regulates the industry in Indiana with a level of oversight requiring approval by the court for a legal transfer of the annuity. Section 7 of Chapter 2 states:
Sec. 7. An Indiana court of competent jurisdiction may approve a transfer of structured settlement payment rights only in a final order that is based on the express findings of the court. The express findings must include all of the following:(1) The consideration that the payee will receive for the transfer reasonably reflects the present fair market value of the future Indiana Code 2015 periodic payments under the structured settlement agreement.
(2) The transfer is in the best interest of the payee.
(3) The transfer will not materially impair the payee’s ability to discharge the payee’s obligations to the payee’s dependents.
(4) If the transferee is the applicant, the transferee has provided to the payee a disclosure statement in accordance with Section 6 of this chapter.
Section 8 of the above-referenced statute goes on to describe the process of filing an application for the legal transfer of an annuity with the court of jurisdiction. After application has been made, the court will notify the applicant of the date, time and place of the hearing but it will not be heard earlier than 20 days after the application has been filed with the court.
Personal injury attorneys experienced with structured settlements
Many of our clients have elected to receive structured settlements as opposed to a single lump sum settlement. Although structured settlements are not always the right solution, they can be a valuable source of future income, particularly for clients concerned with future income or loss of wages.