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Structured Settlements Can Offer Fast Route to Cash

Structured Settlements Can Offer Fast Route to Cash

Today, there are numerous advertisements touting the benefits of selling one’s structured settlement. And, while finding a large check in your mailbox may sound appealing, there are many who are not aware of what a structured settlement actually is or how they work.

In their most basic form, these financial “packages” can be tailor made for their recipients – typically in the form of ongoing income, in return for some type of legal damages that have been suffered.

What is a Structured Settlement?

Structured settlements can take the form of a financial or insurance arrangement. Technically, they are organized, or “structured,” types of cash payments by way of a regular stream of income payments to a recipient.

These settlements offer an alternative for paying the victor in a lawsuit or other situation when a lump sum of cash is not able to be provided, or if the recipient opts to receive his or her funds in installments rather than all at one time.

In receiving funds in regular increments as versus one lump sum, the settlement recipient is also being protected from potential economic hardship. This is because they have the assurance of income over the long term rather than taking the chance of spending all of the settlement dollars within just one short period of time.

In most cases, a large lump sum of cash can look huge – and spending just a few thousand dollars here and there may not seem like it is making a dent in the overall sum. However, over time, chipping away at a lump sum can be detrimental to one’s financial situation. By doling out funds over time, the settlement recipient is far less likely to overspend – making his or her cash last for a much longer period of time.

How Structured Settlements Work

Structured settlements typically begin with a negotiation between two parties, for instance, in a lawsuit. The plaintiff and the defendant will agree on an appropriate schedule of benefits that best match the needs of the claimant.

There are several participants that are involved in a structured settlement deal. These include:

  • Defendant - The defendant is the party that promises, via a contractual agreement, to pay periodic payments over time to the claimant. This is done in exchange for a release of the claim.
  • Claimant (or Plaintiff) – The claimant, or plaintiff, is the party that agrees to release the claim on the defendant in exchange for the defendant’s promise of paying one or more future benefit payments. (This could also be in conjunction with payment of other more immediate items such as liens or attorney’s fees).
  • Qualified Settlement Fund Trustee – It is the qualified settlement fund trustee that will then make an assignment of its obligation to pay future periodic payments to an assignee. It is the assignee that will then assume the payment obligation, making itself the obligor for the promised payments.

The Many Forms that Structured Settlements Can Take

Oftentimes structured settlements are used when compensating an injury victim who has been involved in an accident or other situation whereby they have sustained physical and/or financial damage.

Structured settlements can take on a number of different forms, depending on the needs of the recipient. These can include:

  • Lifetime Annuity – With a lifetime annuity structure, payments will be made to the recipient throughout the remaining years of their life.
  • Lump Sum – The lump sum option can also be referred to as deferred lump sum payments. These payments are made in a pre-determined time period at a future date.
  • Life Contingent Lump Sum – Similar to lump sum payments, this option allows the payments to be made to the recipient, provided that he or she is still alive as of a certain date in the future. In this case, a beneficiary is not allowed to collect the payment on behalf of the original recipient.
  • Joint Survivor Annuity – This option allows payments to be made throughout the life of both the original recipient, as well as the life of another individual.

The Advantages of Structured Settlements

There are a number of advantages to receiving a structured settlement – one of the biggest of which is that the receipt of a tax-free payment stream is obtained over time. Due to their tax advantages, there are many other types of “passive” income such as stock dividends and bonds that simply cannot match the same level of security and flexibility as a structured settlement can.

In addition, the regular and ongoing payment streams that structured settlements can offer include both predictability of payments, as well as financial security and freedom. All of these benefits are typically received without the settlement recipient having to worry about managing the settlement.

Another nice benefit of structured settlements is that they can oftentimes be created out of court. This means that attorney’s fees will be less, as the recipient will not be billed for hours spent by the attorney in the courtroom.