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What Are the Pros and Cons of Structured Settlements?

December 03, 2011 | Comments: 0 | Views: 122

What is a Structured Settlement?

Normally, when someone wins a judgment or settles their lawsuit the defendant is obligated to pay you the settlement amount in one lump sum. For example, if you contracted a disease as a result of using a contaminated drug and won a judgment against the pharmaceutical company, you might settle out of court for a million dollars. That is one option. Another option is a structured settlement. This would pay you in installments over a specified period of time rather than a lump sum.

The U.S. has put into place structured settlement laws at the federal and state levels. At the federal level these include components of the Internal Revenue Code. Those at the state level include structured settlement laws that deal with periodic payment of judgment statutes. These settlements must take Medicare and Medicaid laws and regulations into consideration. Settlements of this type are endorsed by most of the country's biggest disability rights groups, including the National Organization on Disability and the American Association of People with Disabilities.

Installment payments are able to be structured in a such a way to meet your needs and protect you against the effects of inflation. They vary from types with a simple yearly payment to more complicated arrangements that consist of an initial lump sum payment, deferred payments, monthly indexed installments, and certain provisions to provide for the death or future care of the insured.

Normally, the defendant purchases an annuity for a specified dollar amount paid up front. The annuity allows for scheduled income payments on a regular basis as determined by you and your attorney based upon the conditions of the structured settlement.

What are the benefits of a structured settlement?

One important benefit is the ability to avoid taxes. Properly set up, a structured settlement may reduce significantly the plaintiff's tax burden as an outcome of the settlement, and may even be tax-free in some cases.

The structure can also protect you from have the settlement funds dwindle away, when they are used to pay for needs or future care. Occasionally a settlement can be structured to provide protection from yourself. Some people are just not good with finances, or cannot say "no" to family members who want to share in the settlement. If you are not disciplined with your spending, a legally agreed structure may help you ensure the money is not spent quickly, but doled out over a period of time.

Minors may find a settlement of this type to be beneficial as well, since this type of settlement provides for certain expenses during their youth and another disbursement for college tuition, and more disbursements during adulthood. If you are injured or have special needs that are long-term in nature, you may benefit from periodic disbursements to pay for medical equipment or specialized vehicles for mobility.

What are the potential disadvantages of a structured settlement?

For one thing, once you agree to a settlement, you are bound by its terms. You cannot change it at a later time. Therefore, it's crucial to be represented by a good attorney who will assist you in negotiating a settlement that is tailor made to fit your individual needs, such as inflation protection. If your life expectancy is shorter, you may prefer a settlement that provides a guaranteed minimum payment, even if you pass away before the guaranteed period expires. This can provide protection for your family and beneficiaries from being left bereft of income.

One other potential disadvantage of a structured settlement is that unforseen economic changes may make the annuity payments too small. Or the annuity may be placed with brokers who lack enough protection for insolvency.

Properly set up, a settlement structured to meet your needs can be very effective. However, you need to ensure that you are adequately informed before acting. Nothing can replace the good advice of a competent attorney or financial advisor.

Peter Walsh is webmaster at, where he updates a personal finance blog as frequently as possible. He loves to travel, which can make updating the blog more tricky. However it makes getting new pictures for photo personal checks very easy.

Source: EzineArticles
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