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EQUITY Feature Article
Structured Settlements:
Reducing Financial Insecurity in an Insecure World
Randy Dyer1,
Structured Settlements are an option for people that have been involved in accidents, malpractice lawsuits, or worker's compensation cases. Here are some of the reasons they might be the best choice for people with disabilities.
Talk about mixed blessings: You have been injured in an accident; or due to negligence, your son or daughter is born with a disability; or you were injured on the job. Being lucky is the last thing you might consider yourself. But then there is the money. Suddenly, you are being offered more money than you have ever had in your life to settle your case.
It is very tempting to think you won the lottery and take the lump sum payment. You could buy a big house, a fancy car, or go on a permanent vacation. In other words, you could quickly spend all the money before you even know what the rest of your life may be like. Then reality sets in and you begin to understand how expensive living with a disability can be. Is there a way to ensure that you will have guaranteed financial security for life?
Imagine a financial benefit established exclusively for individuals injured and those who have lost loved ones in accidents. This benefit provides living, medical and rehabilitation needs through years of payments free from federal and state income taxes. This benefit also allows those with significant medical costs to maintain eligibility for certain public benefits programs if combined with a Special Needs Trust. Best of all, payments are guaranteed by secure, highly regulated financial institutions with sufficient flexibility that allows even those that receive smaller settlements a way to build assets while having financial security.
Andy Imparato, president of the American Association of People with Disabilities (www.AAPD-DC.org), calls this option “a model benefit” because in addition to the security and tax-free payments, you continue to receive your full payments even if you decide to go back to work.
The benefit is called a structured settlement and it is an option for those involved in physical injury lawsuits, medical malpractice cases, and who have suffered physical injuries at work. With a structured settlement, the parties involved agree to have some or all of his or her compensation paid through a stream of guaranteed payments, rather than receiving the recovery in a lump sum. After experiencing a disabling accident, many of us would be ill-equipped to handle large sums of money if we were trying to recover from the injury and put our lives back together. These payments are tailored to the specific needs of an individual and can provide for the needs of their family as well.
What is a structured settlement?
Since 1983, the federal government has encouraged structured settlements for those experiencing physical injuries that are looking to protect their financial future. To comply with IRS rules, these periodic payments are funded by two of the most secure sources available – a life insurance company annuity or a U.S. Treasury obligation. Payments can be guaranteed for a few years or for a lifetime. They can be in equal amounts or they can include occasional larger amounts in the future to pay for needs such as wheelchair replacement or an operation. They can also include cost-of-living increases.
Table 1: Structured settlement vs. Lump Sum
But remember: In order to take advantage of this, you must agree to the payment stream before settling your case. According to IRS rules, once you sign the settlement, you can’t return six months or a year later and switch your cash payment into a structured settlement.
What follows are some of the most common structured settlement options:
Period certain. This is a straightforward option in which the individual agrees to accept tax-free payments for a specific time, such as 10 or 20 years, to help the claimant recoup lost earnings or meet ongoing medical needs. A period certain structure is most appropriate when the disability caused by the accident is not permanent.
Life. If the disability is permanent and/or more severe, the individual will probably want payments guaranteed for life. Life structures can include payment increases at regular intervals and occasional large lump sums. This is ideal when the individual is a minor and parents are concerned his or her well-being once they are gone.
Joint life. Similar to a “second to die” insurance policy, a joint life structure keeps paying until both the individual claimant and a designated person such as spouse or relative are dead. This is appropriate for spouses who want to ensure their partners’ retirement security – for example, a severely injured husband who wants to make sure his wife has financial security in her later years.
Life with period certain. In recent years, claimants have increasingly demanded minimum guarantees (often 10 to 20 years) attached to their life structures. Should the individual die before the minimum pay-out, the remaining payments go to beneficiaries such as a spouse or child. This helps reassure the claimant that even if he or she were to die prematurely, the family will receive its just compensation.
Advantages of a structured settlement
Consider a few examples in which a structured settlement can produce greater benefit than a lump-sum payment:
Financial Stability. If you have recently acquired your disability, the adjustments to your new life can be difficult. Even if you have a Life Care Plan (see the June ’07 EQUITY Responds section for a glossary of important terminology), planning for a lifetime of needs can be an overwhelming process. Structured Settlements have the ability to reduce financial insecurity for life.
Integrate with other income and insurance. Your payments stream can be tailored to reflect shifts in other income sources. This can maximize your after-tax income and benefits. For example, if you are 40 when you settle your case, your payment stream can include larger payments for the first 22 years. After that, your payments can be reduced because at age 62, you will begin receiving Social Security payments.
Here’s an alternate example: If the person injured in the accident is a minor, the parents’ health insurance will probably cover medical costs until the child reaches maturity. Settlement payments covering medical care can then begin. The benefit to the individual and parents is that the payments will have compounded tax-free for several years.
Remain eligible for some federal benefits. With as little as $2,000 in certain assets, you can be disqualified from some government benefits, including Medicaid and Supplemental Security Income. But if you choose a structured settlement in an irrevocable special needs trust, you can still receive your government benefits. Compare the difference in the following chart.
Table 2: Structured Settlements & Special Needs Trusts
Protection against creditors and divorce. If you run into financial difficulties, depending on state laws, structure payments may offer significantly greater creditor protection than cash. Likewise in a case involving (for example) an injured wife who believes her husband will file for divorce after the settlement, a structured settlement offers greater legal control than a lump sum. The same is also true when the victim is a minor and one parent believes the other cannot be trusted with a lump-sum settlement.
Ease retirement fears. America’s corporate pension plans are dangerously overextended. Many victims should see significant value in a benefit that defers tax-free payments to retirement years and provides guarantees that pension plans cannot match.
Avoid probate. Structure payments automatically bypass probate court if there are designated beneficiaries. Lump sum settlements, by contrast, will be subject to the probate process, which can be lengthy.
From these examples, two issues become apparent. First, structuring payments often creates a more attractive settlement offer than straight cash. Second, if you are considering a structured settlement as an option for settling your claim, you should strongly consider working with a structured settlement consultant. This person is typically a financial specialist who reviews your medical and economic records and then works with you to design an appropriate payment stream tailored to the specific financial needs of you and your family. (Importantly, this will not be an added expense to you. These consultants are paid on commission from the life insurance company that sells the annuity that funds your structured settlement.)
Conclusion
Structured settlements offer a safe alternative to a cash settlement or a trial. They are an option to receive your compensation in the form of a secure, tax-free payment stream that other investment options cannot match.
For many, financial planning is a challenge easily ignored. But for those who have become disabled in an accident, protecting financial security is vital. Often, it means the difference between an independent, fulfilling lifestyle and just “getting by.”
Randy Dyer is executive director of the National Structured Settlement Trade Association (www.StructuredSettlement.info). For more information, please call 202 466 7414.
Reducing Financial Insecurity in an Insecure World
Randy Dyer1,
Structured Settlements are an option for people that have been involved in accidents, malpractice lawsuits, or worker's compensation cases. Here are some of the reasons they might be the best choice for people with disabilities.
Talk about mixed blessings: You have been injured in an accident; or due to negligence, your son or daughter is born with a disability; or you were injured on the job. Being lucky is the last thing you might consider yourself. But then there is the money. Suddenly, you are being offered more money than you have ever had in your life to settle your case.
It is very tempting to think you won the lottery and take the lump sum payment. You could buy a big house, a fancy car, or go on a permanent vacation. In other words, you could quickly spend all the money before you even know what the rest of your life may be like. Then reality sets in and you begin to understand how expensive living with a disability can be. Is there a way to ensure that you will have guaranteed financial security for life?
Imagine a financial benefit established exclusively for individuals injured and those who have lost loved ones in accidents. This benefit provides living, medical and rehabilitation needs through years of payments free from federal and state income taxes. This benefit also allows those with significant medical costs to maintain eligibility for certain public benefits programs if combined with a Special Needs Trust. Best of all, payments are guaranteed by secure, highly regulated financial institutions with sufficient flexibility that allows even those that receive smaller settlements a way to build assets while having financial security.
Andy Imparato, president of the American Association of People with Disabilities (www.AAPD-DC.org), calls this option “a model benefit” because in addition to the security and tax-free payments, you continue to receive your full payments even if you decide to go back to work.
The benefit is called a structured settlement and it is an option for those involved in physical injury lawsuits, medical malpractice cases, and who have suffered physical injuries at work. With a structured settlement, the parties involved agree to have some or all of his or her compensation paid through a stream of guaranteed payments, rather than receiving the recovery in a lump sum. After experiencing a disabling accident, many of us would be ill-equipped to handle large sums of money if we were trying to recover from the injury and put our lives back together. These payments are tailored to the specific needs of an individual and can provide for the needs of their family as well.
What is a structured settlement?
Since 1983, the federal government has encouraged structured settlements for those experiencing physical injuries that are looking to protect their financial future. To comply with IRS rules, these periodic payments are funded by two of the most secure sources available – a life insurance company annuity or a U.S. Treasury obligation. Payments can be guaranteed for a few years or for a lifetime. They can be in equal amounts or they can include occasional larger amounts in the future to pay for needs such as wheelchair replacement or an operation. They can also include cost-of-living increases.
Table 1: Structured settlement vs. Lump Sum
| Structured Settlement | Lump -Sum Payment | |
| Payments free from State & Federal Income Taxes | yes | no |
| Payments free from the Alternative Minimum Tax (AMT) | yes | no |
| Settlement placed in secure investments | yes | maybe |
| Overall life expectancy taken into account | yes | maybe |
But remember: In order to take advantage of this, you must agree to the payment stream before settling your case. According to IRS rules, once you sign the settlement, you can’t return six months or a year later and switch your cash payment into a structured settlement.
What follows are some of the most common structured settlement options:
Period certain. This is a straightforward option in which the individual agrees to accept tax-free payments for a specific time, such as 10 or 20 years, to help the claimant recoup lost earnings or meet ongoing medical needs. A period certain structure is most appropriate when the disability caused by the accident is not permanent.
Life. If the disability is permanent and/or more severe, the individual will probably want payments guaranteed for life. Life structures can include payment increases at regular intervals and occasional large lump sums. This is ideal when the individual is a minor and parents are concerned his or her well-being once they are gone.
Joint life. Similar to a “second to die” insurance policy, a joint life structure keeps paying until both the individual claimant and a designated person such as spouse or relative are dead. This is appropriate for spouses who want to ensure their partners’ retirement security – for example, a severely injured husband who wants to make sure his wife has financial security in her later years.
Life with period certain. In recent years, claimants have increasingly demanded minimum guarantees (often 10 to 20 years) attached to their life structures. Should the individual die before the minimum pay-out, the remaining payments go to beneficiaries such as a spouse or child. This helps reassure the claimant that even if he or she were to die prematurely, the family will receive its just compensation.
Advantages of a structured settlement
Consider a few examples in which a structured settlement can produce greater benefit than a lump-sum payment:
Financial Stability. If you have recently acquired your disability, the adjustments to your new life can be difficult. Even if you have a Life Care Plan (see the June ’07 EQUITY Responds section for a glossary of important terminology), planning for a lifetime of needs can be an overwhelming process. Structured Settlements have the ability to reduce financial insecurity for life.
Integrate with other income and insurance. Your payments stream can be tailored to reflect shifts in other income sources. This can maximize your after-tax income and benefits. For example, if you are 40 when you settle your case, your payment stream can include larger payments for the first 22 years. After that, your payments can be reduced because at age 62, you will begin receiving Social Security payments.
Here’s an alternate example: If the person injured in the accident is a minor, the parents’ health insurance will probably cover medical costs until the child reaches maturity. Settlement payments covering medical care can then begin. The benefit to the individual and parents is that the payments will have compounded tax-free for several years.
Remain eligible for some federal benefits. With as little as $2,000 in certain assets, you can be disqualified from some government benefits, including Medicaid and Supplemental Security Income. But if you choose a structured settlement in an irrevocable special needs trust, you can still receive your government benefits. Compare the difference in the following chart.
Table 2: Structured Settlements & Special Needs Trusts
| Structured Settlements in a Special Needs Trust | Lump-Sum Settlement | |
| Remain eligible for Medicaid | yes | no |
| Remain eligible for State Medicaid Waiver Program(s) | yes | no |
| Remain eligible for Supplemental Security Income (SSI) | yes | no |
| Remain eligible for private care programs based on Medicaid eligibility | yes | no |
Protection against creditors and divorce. If you run into financial difficulties, depending on state laws, structure payments may offer significantly greater creditor protection than cash. Likewise in a case involving (for example) an injured wife who believes her husband will file for divorce after the settlement, a structured settlement offers greater legal control than a lump sum. The same is also true when the victim is a minor and one parent believes the other cannot be trusted with a lump-sum settlement.
Ease retirement fears. America’s corporate pension plans are dangerously overextended. Many victims should see significant value in a benefit that defers tax-free payments to retirement years and provides guarantees that pension plans cannot match.
Avoid probate. Structure payments automatically bypass probate court if there are designated beneficiaries. Lump sum settlements, by contrast, will be subject to the probate process, which can be lengthy.
From these examples, two issues become apparent. First, structuring payments often creates a more attractive settlement offer than straight cash. Second, if you are considering a structured settlement as an option for settling your claim, you should strongly consider working with a structured settlement consultant. This person is typically a financial specialist who reviews your medical and economic records and then works with you to design an appropriate payment stream tailored to the specific financial needs of you and your family. (Importantly, this will not be an added expense to you. These consultants are paid on commission from the life insurance company that sells the annuity that funds your structured settlement.)
Conclusion
Structured settlements offer a safe alternative to a cash settlement or a trial. They are an option to receive your compensation in the form of a secure, tax-free payment stream that other investment options cannot match.
For many, financial planning is a challenge easily ignored. But for those who have become disabled in an accident, protecting financial security is vital. Often, it means the difference between an independent, fulfilling lifestyle and just “getting by.”
Randy Dyer is executive director of the National Structured Settlement Trade Association (www.StructuredSettlement.info). For more information, please call 202 466 7414.