These FAQs have been compiled to answer basic questions about structured settlements frequently asked by injured parties. To use the accordion feature, simply click on the question and the the answer will appear.
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Clients have three payment options when their claim or lawsuit is settled: 1) a lump sum cash settlement, 2) periodic payments through a structured settlement annuity or 3) a combination of cash and structured payments.In years past, personal injury settlements always involved lump-sum payouts. While the payout was tax free, the money earned from the settlement was taxable unless invested in tax-free municipal bonds. The Internal Revenue Service allows defendants in injury cases to purchase insurance annuities to fund structured settlements to the injured parties with all proceeds from the annuities tax-free.
Using annuities, injured parties receive guaranteed tax-free income issued by an A or A+-rated life insurance company. Injured individuals can decide to receive 100 percent of the funds through a structured settlement annuity or a combination of an annuity with a cash component for immediate or emergency situations.
Structured settlements came about in 1982 when the U.S. Congress passed The Periodic Payment Settlement Act of 1982 (Public Law 97-473). The act enables injury victims to obtain customized structured cash payments plans through insurance annuities that assure them guaranteed, tax-free income over time. Previously, most settlements were paid out in lump sum cash payments with any money earned from the settlement subject to taxation. Injured parties, usually unaccustomed to receiving large sums of money, quickly went through their settlement proceeds and were soon left with nothing.
During settlement negotiations, plaintiff and defendant attorneys determine the injured party’s ongoing medical care, living and family needs (i.e., possible future medical treatment, in-home nursing expenses, college tuition for dependent children, adjustments to living quarters). Once the injured party’s needs are determined and a dollar amount assigned, the defendant (or its insurance company) agrees to the settlement and funds the obligation by purchasing an annuity from a high-rated life insurance company. This insurance carrier or “assignee” then takes over the liability from the defendant and begins making periodic payments to the injured party.
Structured settlements are often created for individuals who want guaranteed tax-free income over the course of several years or for a lifetime. Here are typical scenarios:
- Temporary or permanently disabled injured parties.
- Individuals attempting to retain some portion of their settlement for future use.
- Total or partial wage loss for any period of time.
- Guardianship cases, including minors.
- When the settlement is a large portion of all of the injured party’s future support.
- As an alternative to investing part of settlement proceeds.
- Severe injury, especially shortened life expectancy, and the mentally incompetent.
- Death cases with surviving spouse and/or children needing monthly/annual income.
- Deferred payments for college funds, retirement, mortgages or attorney fees.
- Workers’ compensation cases.
- Any case where a secure, tax-free, high yield income makes sense.
For injured parties, structured settlements provide a tax-free income stream, possibly for life, without fear of money mismanagement or market fluctuations. Typically, future income and upfront cash for attorney fees, medical expenses and related liens are included in the package. In the event of the injured party’s death, a guaranteed (also tax-free) portion of the settlement maybe made to the estate or a named beneficiary such as a spouse or child.
To qualify for the income tax benefits of a structured settlement, the recipient cannot accelerate, defer, increase or decrease the payments. The payments also must be fixed and set at the time the settlement is created. The money used must come from the defendant or its insurer in an amount no greater than the original liability.
State and federal solvency standards and regulations protect annuity policyholders in a number of ways. Regulators use conservative accounting and investment rules, which keep insurers from investing heavily in risky investments. Investments are typically high-quality investment grade fixed income securities. Structured settlement annuities enjoy competitive returns compared to other conservative investments in addition to their tax-free status.
In California, companies offering structured settlements must be first approved by the California Department of Insurance. The department evaluates the insurance carrier’s solvency and whether the carrier complies with California regulations. Carriers are also subject to mandatory annual audits and other financial compliance requirements.
By regulation, all annuity reserves must have assets that are equal to or exceed the corresponding payment obligations. In addition, the assets supporting these reserves may not be removed from the life insurance company. Reserve sufficiency is mandatory and is frequently monitored by state legislators and auditors. State insurance commissioners have developed these regulations to preserve the solvency of general accounts in which assets are held so that contractual obligations to policyholders are met. These general accounts support only the obligations of the insurance companies–and not the obligations of a parent company or other subsidiaries.
Yes. After the injured part passes away, a structured settlement can dictate that any remaining annuity sums be paid in continuing periodic payments for a specified number of years to a beneficiary or beneficiaries.
No. Once a structured settlement is ordered, it may not be altered. You may only receive money from the annuity on specified dates in the original structured settlement agreement. The structured settlement, however, can offer great flexibility. Money can be designated to be paid on specific dates or for future education costs, a new car, even a new home.
Yes. Factoring companies, which also buy lottery winnings, casino jackpots and other annuity-based payouts, use television and print advertising to reach individuals with structured settlements, offering to buy the settlement annuities at deeply discounted rates and paying the individuals a lump sum. (These lump sums are fully taxable, unlike annuity payments.)
Settlement buyouts require court approval. If the buyout is in the "best interest" of the injured party, the court approves the sale. California SB510, signed into law in 2009, gives the courts explicit guidelines to decide whether a buyout is appropriate. Some of these guidelines include a review of the injured party's current and future financial needs, whether the party has received independent legal and financial advice concerning the buyout and if the "discount rate" proposed by the factoring company is in keeping with current market rates. The courts req
Structured settlements are an innovative way to compensate injury victims using streams of tax-free payments tailored to meet the injured party’s future medical needs and living expenses. Encouraged by the U.S. Congress since 1982 with the passing of the “Periodic Payment Settlement Act,” structured settlements are arranged between the defendant and the plaintiff (injured party) during settlement discussions. Due to their proven effectiveness, they are promoted by judges, attorneys and claims professionals across the country.
In its most fundamental form, the defendant or its insurance carrier agrees to a structured settlement financial plan designed to compensate the injured party/plaintiff. It is limited only by the ingenuity of the structure consultant involved. The defendant funds the settlement obligation through the purchase of an annuity from a highly rated life insurance company. Payments are then made by the life insurance company to the injured party/plaintiff.
Structured settlements provide guaranteed streams of income to the injured party/plaintiff, which are exempt from state and federal income taxes. The guaranteed payments help avoid the risk of mismanagement of settlement funds, which could result in financial loss and hardship. This security and stability enables the injured party to have peace of mind, knowing that payments will be received on the scheduled dates, and that the payments can be tailored to meet specific future life needs. With a lifetime annuity option for example, you can be sure that you will never outlive the stream of income, as the payments will continue until death.
The traditional tax-free structured settlement can be used in any case involving physical injury or sickness as a result of a wrongful action, such as medical malpractice or an automobile accident. It can also be used in wrongful death cases, where surviving family members are involved in the litigation. In this instance, the surviving members can utilize a structured annuity providing guaranteed payments. In most states, traditional structured settlements can also be used in workers’ compensation claims.
Yes. A structured settlement should always be considered in cases involving minors. Structured settlements provide payments to coincide with important life events such as college, the need to purchase reliable transportation, buying a home and to start a family. They also prevent minors from having access to all of their settlement proceeds upon reaching the age of majority when they could make ill-advised decisions that could exhaust the funds quickly.
Yes. An increasing number of structured settlements are being used in non-physical injury cases such as property damage, employment cases, environmental clean-ups, real estate and business transactions and other litigated matters. In these “non-qualified” structures, settlement funds are tax-deferred until the year they are paid, rather than tax-free. For more information on non-qualified structured settlements, please contact an Atlas Settlement Group consultant.
With access to every life insurance company in the structured settlement marketplace, you can be assured that Atlas Settlement Group obtains the best annuity rates. In addition, Atlas Settlement Group provides benefit comparisons of other similarly rated life insurance companies.
Most annuities contain guaranteed benefits which will be paid whether the injured party/plaintiff is living or not. Annuities that provide a lifetime income can be established with a guaranteed period of a certain number of years. For example, an annuity providing monthly payments for life with a guarantee period of 20 years would pay for the first 20 years, no matter what. If the injured party/plaintiff were to die after five years, the monthly guaranteed benefits would continue to their beneficiary for the remaining 15 years of the guaranteed period. If the injured party/plaintiff lives past the first 20 years, the monthly payments would continue until they pass away. Period certain annuities and lump sum payments are guaranteed regardless of whether the injured party/plaintiff is living; any period certain payments made after the death of the injured party/plaintiff would be paid in full, tax-free, on the scheduled dates, to the designated beneficiary.
Our services are free of charge to all our clients - injured parties/plaintiffs, defendants/insurers, attorneys, claims professionals or any other party who engages our structured settlement services. Atlas Settlement Group is paid a one-time flat commission directly from the life insurance companies where annuities are placed.
