Firstly, what is structured settlement? When you a plaintiff settles a court case for a big sum of money, a structured settlement is proposed as a means of paying the settlement in installments over a period of time, instead of one big lump sum of cash. This is typically created through one or more annuities which provide a stream of fixed payments over a predefined period of time usually.
There may be tax advantages in structured settlement which, with the appropriate set up, can reduce the plaintiff's tax obligations. In some circumstances, it may be tax-free! Structured settlement can be used also surprisingly as a means of protecting the plaintiff himself against he or she may be able to manage the cash available to them carefully, therefore protecting them against unnecessary squandering. Other people may also benefit from structured settlements - the young, injured, disabled for example. If you get into an accident, auto insurance may also do this.
However, there are some disadvantages of course. Those who need the cash immediately may not have access to all the cash as it is being spread over a long period of time. Those better with cash could actually get a higher return from the single lump sum if invested wisely in bonds, stock markets or property. Therefore, over the long run, the effective cash is higher if paid all upfront than spread over a period of time.
There are other things that you need to worry about when it comes to structured settlement. Firstly, the insurance companies can charge a large amount of commissions on the annuities or overstating the value of the structured settlement. Certain lawyers are not totally independent, and may have self interest in their insurance business at the same time.
There are also cases where structured settlement can be sold! For example, if you are receiving $20,000 every year for the next 10 years, by the end of the period, you will be receiving a total of $200,000. If you are in need of a big lump of cash, you can sell to a willing buyer for $150,000 (for example) for the cash upfront - so it is a win-win situation for both parties. However, depending on where you are, local laws may restrict such practice, and also you would most likely require court approval for the sale.
In summary, we have covered the basic of structured settlement, and also the following:
- Selling Your Structured Settlement
- Cash for Structured Settlement