What Are Structured Settlements And How Do They Work?
Structured settlements are used to compensate individuals who have been awarded a large sum of money. They are most commonly used when an individual has been seriously injured or disabled due to the negligence of another individual or organization. They are also frequently used to pay jackpot lottery winnings.
Instead of paying a lump sum of cash, structured settlements are paid out over a period of time. Payments can be issued monthly, quarterly, semi-annually or annually. These payments are backed by an annuity distributed through life insurance companies. Structured settlement payments are tax-free.
There are many types of structured settlements. Each is designed to suit the individual’s financial requirements. Some are paid for a specific period of time, while others are paid for the remainder of the recipient’s life.
When structured settlements are paid over a period of time, it is referred to as “Designated Period” or “Period Certain Annuities”. What this means is the recipient will receive a set amount of money at a specific time (monthly, annually) for a predetermined number of years. If the recipient dies before the structured settlement is paid in full, the remainder will be distributed to the designated beneficiary.
Life annuity structured settlements are paid to the recipient for the remainder of their lifetime. It’s important to note in many cases “life” may actually refer to a certain number of years based on the individual’s life expectancy. Also referred to as “Period Certain”, this type of structured settlement annuity will transfer to the beneficiary if the recipient passes away prior to the designated number of years.
Lump sum annuities provide a lump sum payment at a future date. This type of structured settlement is enticing to people who have children. The funds can be arranged to pay out when the child enters college and helps to pay for educational expenses. Two types of lump sum annuities are available — “Lump Sum” and “Life Contingent Lump Sum.” The first allows transfer of the annuity to a designated beneficiary, while the second does not.
Life annuities provide monthly structured settlement payments for life. Two types of life annuities are available — “Life Only” and “Joint and Survivor.” The first offers no provision to assign a beneficiary, whereas the second continues payments to the beneficiary for the remainder of their life.
Last, but least, is the Temporary Life Annuity. This type of structured settlement pays regular payments for a specific number of years. The annuity ends when the recipient dies, as there is no beneficiary provision.
While structured settlements provide long-term financial security, there are a few drawbacks. The main drawback is once the papers are signed, there is no way to change them. If unexpected expenses occur, money cannot be withdrawn from the account.
Drafting structured settlements is a complex process which requires the skills of an attorney who is well-versed in this area of law. Careful consideration must be taken into account when drafting these complex documents. When structured settlements are properly drafted they can provide the recipient with necessary funding and peace of mind.