Structured Settlements Questions

Finance Articles | March 29, 2010

Before we can understand what a structured settlement is, we have to understand what other types of settlements there are. When an individual becomes a claiment in a personal injury action, that individual must take into account any future earnings that they may be losing out on as a result of their injury. They must also take into account any future expenses their injury may incur in the form of medical bills or other important care.

Lump sum settlements occur when a one-time payment is received to cover all future expenses and/or loss of earnings. The key idea behind one payment settlement trusts that the claimant will responsibly handle all future expenses and investments responsibly. Lump sum payments are often recommended to those in low tax brackets, and/or those who have personal experience with investments. A lump sum has several advantages, as well as several disadvantages.

Lump sum disadvantages

Any investment income is taxed
Performance of investment risk
Possibility of running out of funds before death
Management fees

Lump sum advantages

A quick and easy settlement method
Several different investment options
Easy access to money

Structured Settlements are a periodic payment of compensation method that covers claimants for loss of earnings, future care costs, general damages, and wrongful death.

As is most commonly the case, the payments are designed to help meet the claimants needs. Generally, payments are made on a monthly bases to help a claimant meet regular expenses. A typical settlement can also include one off sum payments in order to take care of large financial requirements. Structured Settlement payments are made by the insurance company, or the defendant, through the purchase of an annuity contract under which all payments are directed towards the claimant. It is the responsibility of the insurers to ensure a claimant receives their payments, or the insurer must arrange for another party to do so.

There are some important differences between one time payment settlements and Structured Settlements (in particular, Structured Settlements are tax-free), as well as some advantages and disadvantages with Structured Settlements

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