If you are seriously injured and worried that your settlement may not allow you to meet your future financial obligations, a "structured settlement annuity" may provide you with the assurance that the money you receive from your lawsuit will be sufficient to meet your future expenses.
WHAT IS A STRUCTURED SETTLEMENT
Let’s assume that you receive $500,000 from your settlement. You might elect to take $100,000 in cash, and put $400,000 in a structured settlement annuity. The $100,000 could be used to take care of immediate expenses. The $400,000 would be invested in an annuity contract that paid you a series of guaranteed, income-tax free, future payments.
For example, if you were thirty-five years old, $400,000 invested in an annuity contract would pay you $2,500 per month for life. Your total future pay-out, with $400,000 invested in the structure, would approximate $1.5 million. This money would be paid out in monthly increments, and would be tax free to you.
WHAT ARE THE ADVANTAGES OF A STRUCTURED SETTLEMENT?
A structured settlement is tax free and guaranteed as long as you live. The structured payments can be guaranteed for a certain number of years, even if you die, if the contract expressly provides for this. A cash settlement is initially tax free. However, the interest earned investing the cash settlement is usually taxable.
An advantage of a structured settlement is a fixed, guaranteed future payment. By investing in a structure, you eliminate the risk associated with taking your cash settlement and investing in the market. When you structure a settlement, the settlement proceeds can be invested in a highly rated, well capitalized insurance company. The rate of return on the investment in a structure is guaranteed and fixed. When you invest a cash settlement, the return on your investment is not guaranteed, and fluctuates. You could actually lose money, or your return on investment could be marginal. We all know what has happened to the stock market the last few years.
Another major advantage of a structured settlement annuity is the settlement money is not spent quickly. Settlements are often designed to compensate an injured person for a lifetime. In many instances, though, settlement money is depleted within a few years by purchasing high cost items, lending money or investing in risky business ventures. A structured settlement can avoid these potential problems.
A structured settlement may guarantee that your family will be able to meet its financial needs for many years to come. With a settlement structure, you also have the option of taking lump sum payments. The settlement may be designed to provide one time payments at specific ages. With a structure, you could opt to receive specific lump sum amounts in years when you anticipate having to pay college expenses for your children. Or, you could elect to receive lump sum payments during years when you anticipate having to pay for your own education.
OTHER IMPORTANT CONSIDERATIONS
You cannot purchase the settlement annuity after you receive the settlement proceeds in cash. Therefore, if you are going to set up a structured settlement annuity, you need to make that election before you receive the settlement proceeds. If you are not sure how you want to design your structured settlement, and the settlement is imminent, you might consider a 468B Fund. A 468B Fund can be established at settlement to allow later distribution into a structure, if you are undecided as to what type of structure to choose.
Once you elect a structured settlement, you cannot change the payment plan. Consequently, you should carefully consider the payment schedule before you finalize your decision. You may also want to consider taking a portion of the money in a cash settlement to retain some flexibility, since periodic payments under the structure may not always meet financial needs.
As your attorneys, Hoey & Farina cannot offer you financial advice, nor can we guarantee financial results. This article is intended to be helpful in illustrating some of the potential advantages of a structured settlement.