What is a structured settlement?
- July 27, 2016
A structured settlement is a settlement where regular payments are made to the plaintiff. These payments could last for years or to the end of a plaintiff’s life. Structured settlements are great for certain plaintiffs because plaintiffs can receive income over years or over their entire lifetimes. For some plaintiffs, receiving a structured settlement can be better than receiving a one-time lump sum payment.
One of the major benefits of a structured settlement is that it is tax free. In the United States, personal injury settlements are handled by the IRS as “tax-free” income. There can be reasons why personal injury settlements may incur some tax. However structured settlements generally do not incur tax. State insurance laws can be helpful in structured settlements because there are laws regarding the handling of structured settlements and state ‘s guaranty association will pay for any problems.
There are some negative for using structured settlements though. Some of the negatives of using structured settlements include treatment of punitive damage, economy/currency risk, and lack of information about structured settlement offers. Punitive damages unlike the rest of the structured settlements can be taxed. Structured settlements can also have great economy and currency risk. If the currency of the holder of the structured settlement is worth less than previously because of economic shock or other reason for depreciation of the country’s money, the income from the structured settlement may not be enough to cover needs. The last negative element about structured settlements is that it might not be understood correctly by all parties and that some parts of the structured settlement can be hidden. Without such information about the particular nature of a structured settlement, it can be difficult to use logic to determine the value of a structured settlement vs a one-time lump sum payment.
The mechanics of structured settlements can be complicated, but so are many other similar consumer financial products. Structured settlements can be paid to the plaintiff either annually, monthly, or weekly. Structured settlements can also make payments to plaintiffs at the same rate or at an increasing rate, which is used to try to keep up with inflation changes of a country’s currency.
To understand what a structured settlement is. It is good to look at examples to make sure that the concepts behind structured settlements are understood. A first basic case would be a food factory worker who has suffered from an accident. Joe was a factory worker who had worked at a factory for a few years as a factory worker employee. While installing complicated electrical hardware, Joe is killed by electrocution. Joe has a wife and two kids that need help in order to make a basic income. Since Joe was covered, the factory agrees that the accident was not Joe’s fault and that Joe’s wife and kids are entitled to a structured settlement of $2,500 per month for the next thirty years. Joe’s wife will receive income over the next thirty years in order to take care of herself and her kids.
Another example of a structured settlement in practice is Roberta who can no longer walk due to a car accident. Roberta was coming back from a restaurant in her hometown when a drunk driver hit her car. Roberta lost the ability to walk because of the accident. Since she had insurance from the state of New York (where her hometown is located), she will receive a monthly payment of $1,400 over the next thirty years. Since she cannot walk, she would not be able to to continue in her job or easily find a another job. The structured settlement will allow Roberta to pay for herself over the next thirty years.
Overall, a structured settlement is a great alternative to a lump sum that can work in many situations. Structured settlements can help plaintiffs meet their income needs over long period of time.