Structured Settlements: Are They Right for You?

A structured settlement is a guaranteed tax-free monthly payment, only available to people who are settling personal injury claims. It is created when a part of a personal injury settlement is deposited with a life insurance company in exchange for guaranteed tax-free payments for a plaintiff’s lifetime or a certain period.

There are several benefits to a structure such as:

  1. Monthly payments are guaranteed.
  2. It protects the injured party from losing or mismanaging money as opposed to a lump sum which can easily get mismanaged. This provides greater degree of financial security over the course of their lifetime.
  3. Structured settlement payments do not count as income for tax purposes, even when the structured settlement earns interest over time.
  4. Structured settlement payments have no fees or taxes and allow the continuation of government benefits.
  5. Payments can be scheduled for almost any length of time and can begin immediately or be deferred for as many years as requested.  The structure can be indexed to offset inflation. Keep in mind in such cases, the initial monthly payments will be lower but will increase over time.
  6. Spreading out payments over time can reduce the temptation to make large, extravagant purchases, and it guarantees future income. This is especially helpful if you have a medical condition that will require long-term care.
  7. Unlike stocks, bonds and mutual funds, fluctuations in financial markets do not affect structured settlements.
  8. A structured settlement annuity contract often yields, in total, more than a lump-sum payout would because of the interest the annuity may earn over time.
  9. The structure costs ZERO to the injured accident victim.


Of course, with along with benefits, there are some potential drawbacks such as:

  1. The insurer may seek what is known as a reversionary interest meaning that if the injured person dies prematurely then the money goes back to the insurer.  However, this can be waived.  If the reversionary interest is waived, in the event of the recipient’s premature death, the contract’s designated beneficiary can continue to receive any future guaranteed payments, tax-free.
  2. Structured settlements are typically paid out over a period of time, which can make it difficult for the injured party to access funds when they are needed most.
  3. Once a structured settlement is agreed upon, the injured party loses control over the funds and may not be able to make changes to the payment schedule or amount.
  4. Structured settlements are typically not adjusted for inflation, which means that the value of the payments may decrease over time.
  5. The injured party may not be able to use the funds from a structured settlement to make investments that could potentially earn a higher return.
  6. The injured party may not be able to change the terms of the structured settlement, which can be problematic if the individual's needs change over time.
  7. Structured settlements can be complex and difficult to understand, which can make it difficult for the injured party to make informed decisions about their settlement.

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