Imagine yourself as a plaintiff and you have just settled your lawsuit with a company for a large sum of money. You can choose to cash out the lump sum or receive something called a structured settlement. A structured settlement is an arrangement made to pay the settlement in installments over time. This would usually be accomplished by purchasing an annuity.
Annuities provide regularly scheduled payments as specified under the terms of the structured settlement. The terms would depend on your personal and/or financial situation. You would opt for minimum installments if the reason for your settlement has compromised your life expectancy. If you have special needs that require large periodic expenses such as medical equipment, you may customize the timing of each payment accordingly.
Structured settlements may be a prudent choice if you have poor spending habits. Rather than blowing through your lump sum, you are guaranteed a steady source of income for life. Another advantage is the reduction in taxes needed to be paid that would otherwise be substantial for a lump sum.
Structured settlements have disadvantages as well. Once the terms for the structured settlement are agreed, they cannot be changed in the future. Those who wish to buy a new home, or other expensive items are not allowed to borrow against their future payments arranged by their settlement.
If you decide you need more money immediately, you may opt for a structured settlement factoring transaction. In this process, the owner of the structured settlement can sell all or a portion of his or her future payments for a lump sum albeit a lesser value. This may or may not be possible depending on where you live. Two thirds of the states have enacted laws which restrict the sale of structured settlements. Tax-free structured settlements are subject to federal restrictions on their sale to a third party.
In the event of a particularly large settlement, an important option to consider is the use of multiple insurance companies for annuity purchases. This provides added protection in the event that one of the insurance companies goes bankrupt, thus, defaulting on the settlement payments; you will still be able to receive payments from the other companies.
Larson, Aaron. “The Structured Settlement.” Apr. 2005 <http://www.expertlaw.com/library/personal_injury/structured_settlement.html>
Note: Companies that offer to purchase your structured settlement regularly offer a mere fraction of the value of that settlement. Many victims of structured settlement purchases respond to television advertising and do not understand that they are giving up most of the value of their asset.
Also, any transaction that may have tax consequences should be entered into only after receiving competent tax advice from a licensed tax advisor. Any information regarding taxation of these types of transactions is supplied only for informational purposes and should not be relied on as tax advice.