Frequently Asked Questions

A structured settlement is the periodic payout of a settlement amount over a period of years, in addition to a lump-sum payment or other benefits, which is intended to meet the present and future needs of a claimant on a tax-free basis.

 

2.     HOW DOES A STRUCTURED SETTLEMENT WORK?

• Defendant/Insurer — through a contractual agreement, purchases an annuity policy with all or a portion of the negotiated personal injury damages.

• Plaintiff/Claimant — agrees to release the defendant in exchange for one or more future benefit payments through a structured settlement agreement.

• Through a negotiation process, the parties come to an agreement on a schedule of benefits to match claimant’s needs, the life insurance carrier funding the annuity payments and, in most cases, the obligation for payment is transferred to a third party assignee.

• Agreement is reached with the supporting documentation necessary for the completion of the settlement by all parties involved. In most cases, the documents will consist of the settlement agreement/release, any required court orders or probate approvals, the annuity contract, and assignment agreement.

3.     WHO BENEFITS FROM A STRUCTURED SETTLEMENT?

In most cases, all parties involved in the settlement of personal injury and damage claims will benefit from the use of the structured settlement process.

• The claimant benefits by securing a guaranteed, tax-free stream of income payments over a specific period of time, or over a lifetime. The claimant is free of money management worries and the potential for loss or dissipation of the funds by unscrupulous advisors and well-meaning, but inexperienced, relatives and friends. The purpose and integrity of personal injury damage awards are maintained and conserved for whom it was intended, the injured party.

• Advantages to the defendant:

• More economical settlements

• Faster case resolution

• Lower litigation expenses

• Assignment of liability to a third party

• The defendant (liability insurer, self-insured or a governmental agency) benefits by a faster, more efficient resolution of pending claim files and an awareness of the satisfaction derived by meeting a moral and ethical obligation to the claimant. In some cases, structured settlements may reduce costly legal and administrative fees, thus allowing more claim dollars to directly benefit the claimant.

• Society as a whole benefits from the continued use of structured settlements since injured parties will be assured of fair compensation for their injuries and the opportunity to maintain an adequate standard of living. The uncertainties of money management and improper investments are minimized, and claimants will not become wards of the state or dependent on government welfare programs.

Depending on the specific needs of the Claimant, various payment options include:

• Life Annuities that provide lifetime guaranteed income and allow the claimant to maintain an adequate standard of living.

• Lump-Sum Payments that can be made at predetermined time periods for special funding needs such as college education, future medical costs, retirement planning, and as a hedge against inflation.

• Step Annuities provide income that incorporates graduated increases over the initial payment amount for a fixed period and/or lifetime.

• Percentage Increase Annuities, like Step Annuities, provide graduated increases over the initial payment amount by using a fixed percentage (usually 2%-6%) to provide annually increasing income as a protection against inflation.

• Deferred Annuities allow a claimant to defer the start of benefit payments to a later date, if desired.

• Period Certain Annuities may be requested when income is needed for a specific time period only, or to assure that a lifetime annuity is paid for a minimum number of years.

• Joint and Survivor Annuities can be purchased for two separate annuitants under one contract, whereby payment will continue to the surviving annuitant after the primary annuitant’s death, usually at a pre-determined percentage of the original benefit.

 

 

• A properly designed structured settlement is “tax-free” under Internal Revenue Code Section 104(a)(2), which states, “Gross income does not include…. The amount of any damages received (whether as lump sums or as periodic payments) on account of personal injuries or sickness;…. All income derived from the settlement is tax-free, regardless of any other sources of income available to you.”

• Under Internal Revenue and State tax laws, all proceeds from a structured settlement are 100% free of all income taxes. In addition, if you should die prior to all the guaranteed payments being made, those remaining payments are also paid tax-free to your beneficiary.

• A cash settlement would be tax-free, however you would then pay taxes on the earnings you receive from the bank or other investments. The rate of return from a structured settlement is not only tax-free but higher than alternative investments.

 

 

6.     WHERE IS THE SETTLEMENT INVESTED? IS IT SAFE?

• Settlement annuities are purchased from only the highest rated and financially stable life insurance companies, as rated by A.M. Best Company, Standard and Poors, Moody’s and Duff & Phelps. These independent rating agencies analyze the insurance company’s claims paying ability, credit worthiness, and overall financial condition. A claimant can be assured of the safety of his settlement proceeds and a comfort level in knowing that long-term benefits are secure.

• Reputable life insurance carriers specializing in structured settlements will exercise due care in matching long-term investments to the long-term benefit stream necessary for most structures. The overall investment philosophy is one of safety and diversification, and is intended to meet the long-term obligation to the annuitant. A structured settlement guarantees that funds awarded for the claimant’s benefit remain available for the benefit period chosen or lifetime.

 

Page>   1     (2)    (3)

Return to Home Page