Questions about Structured Settlements

What is a Structured Settlement?

A structured settlement is a future stream of payments that is paid tax-free to you. Instead of taking all cash at the time of settlement, you have a second option. You can take less cash and a future stream of payments paid by a strong life insurance company. Splitting your award between up front cash and a future stream of payments is called a structured settlement. In a structured settlement, all the future payments are tax-free, saving a considerable amount of money. An example of a future stream of payments is $2,000 per month for life, with a 20 year guarantee (will pay a minimum of 20 years even if person dies prior to 20 years).

Congress did a study and found that many people who received large lawsuit awards because of physical injuries lost the money very quickly, usually within 5 years. Besides dealing with the stress of their injuries, many injured people faced the added stress of investment or loan requests from relatives, friends and neighbors. Many discovered that they were made to feel very guilty if they did not help these people out, after all, they were now "rich". A large amount of money can disappear amazingly fast.

Many of them could no longer work because of their injuries, and they had now spent all their money on bad loans and investments, they were often forced to turn to public assistance.

Congress saw the necessity to protect ordinary, non-professional investors by having the option for long term, very safe investments with good returns. Congress decided to remove all tax obligations for those who took future payments in a structured settlement. By removing your silent partner, the IRS, (who always has their hand in your pocket) the structure option looks very attractive. In essence, Congress wanted to make the long term safe investment so attractive because of no taxes that you wouldn’t want to miss the opportunity.

Yes, with over $50 billion in structured settlements since the early 1980’s, the government has lost billions in tax revenues. But it is good public policy because it has helped the truly needy. The government has also saved billions on public assistance to those who would have been broke after a few years.

No. Only those who are receiving money because of a physical injury. So this is available to less then 1% of the population. Also, those who are injured must purchase the structure at the time of settlement. After the settlement agreement is signed it is too late.

A Structured Settlement is a highly custom and competitive product.  Many companies offer a life expectancy discount for injured plaintiffs and also a special daily rate that may be better then the book rates.  So life insurance companies must make a "custom" bid on each situation.  That is why an estimate can only be offered on this site.  You are encouraged to submit the information to us via e-mail, phone, fax or mail so that we can provide you with an accurate quote.

As a general rule of thumb you will save between 25% and 35% in state and federal taxes. Each situation is unique and has to be analyzed to figure exact savings. So if you were to receive a million dollars paid slowly to you over time, you would keep the $250,000 to $350,000 that would normally go for taxes to the state and federal government.

What am I giving up if I take the Structured Settlement as opposed to all cash?

To receive the tax break, Congress said that the future stream of payments must be "fixed and determined" at the time of settlement. The payment stream can't be changed after settlement. So you lose some flexibility in that the payment dates and amounts cannot be changed.

From Congress’s point of view, it is the flexibility that gets people into trouble in the first place, so Congress wants you to trade your flexibility for a big tax break. Of course you can keep total flexibility by taking all cash. You can get around this somewhat by how you structure your payments.

Let’s say you are looking at a structured settlement that would pay you $3,000 per month for life. Instead you decide to take a second choice that cost the same, and pays you $5,000 per month for 10 years only. The second option would pay you tax free a total of $600,000 over 10 years. You would have more flexibility because you get your money back quickly. However, after 10 years, no more tax-free payments. To maintain access to your cash, you would take advantage of the structured settlement for a shorter period.

Very safe. Some of the biggest strongest companies in America offer structured settlements. Some of these companies have over $50 billion in assets and have existed over 100 years.   Some also have the highest possible rating from A.M. Best, Standard & Poor's, Moody's or Duff & Phelps.

Yes. The structure can be tailored to meet your needs. Usually we provide three structure options for you first to consider. You make changes on those to meet your needs.

People generally choose a life annuity with a guarantee period. For example, $2,000 per month for life with a 20 year guarantee. Payments will be paid a minimum of 20 years and then for the life of the person thereafter.

Payments will continue each month until the 20 years are over. Payments will be made to your estate, or your beneficiary if you named one.

You can have your payments increase each year you are alive. For example, you may purchase an annuity with a 3% increase each year to fight inflation.

For the lifetime financial security they provide and because people want to transfer the risk of living a long time to an insurance company. The hardest part of financial planning is not knowing how long you will live. As an example, let us look at a 65 year old with $200,000. If he spent $50,000 per year the money would be gone in about 4 years. If he spent $20,000 per year the money would be gone in about 13 years (with the interest). How much should he spend each year to live at the highest standard of living?

Exactly. That is why he should transfer the risk of living a long time to the insurance company. Even if he lives to be a hundred years old, his standard of living is protected. It removes a lot of stress knowing you have lifetime financial security.

In this case the insurance company would lose money. They play the law of averages. The insurance company makes money on those who live shorter then expected and lose money on those that live longer then expected.

It is very unlikely. If you gave the cash to the investment manager, he has to do a lot better then the insurance company because of the taxes that will need to be paid. Insurance companies are intensely competitive and hire the best money managers available. Besides, only life insurance companies can offer life payments.

Yes. Take the structure proposal you like to the investment manager and see if he can offer a better price for the same stream of future payments with equal safety. Be sure and tell him that the payments in the structure proposal are all tax-free, because he won’t believe it. After 16 years, I have never seen an investment manager make a better offer in writing.

Because structured settlements are rare, and are only are available for those with physical injury lawsuits. Many people haven’t heard of them, including most investment managers. If he insists it can’t be true, refer him to section 104(a) and 130(c) of the IRS code.

Yes. For example, someone may have a life annuity that pays $2,000 per month plus a $50,000 lump sum every 5 years. People often like to divide their money into two parts. The monthly payment often just covers general expenses. The lump sums are for special uses, such as vacations, major purchases, or to invest. With the lumps sums paid every few years, it is easy to plan for these events.

Insurance companies encourage you to sign up for electronic transfer directly into your account. You don’t have to worry about your check then. For those who would life to receive a check in the mail, the checks are mailed out 10 days in advance of the due date.

Can’t I buy an annuity with my money after settlement if I take all cash? It would give me more time to make up my mind.

Yes. But it is not a structured settlement annuity and so you would have to pay taxes on it. Also, the rates are not as good. So, not only do you pay more for the annuity, you pay taxes as well.

There are a number of reasons that have to do with life expectancy, competition, and premium taxes. As an example, insurance company X offers both regular annuities and structured annuities. This company will charge 5.9% more to same healthy person for a regular annuity (in this case a 60 year old woman). So you pay more and pay taxes.

Tax deferred annuities are the same as regular annuities. The tax deferred language they use is somewhat deceptive. You are taxed each year with a regular annuity. However, some of the money paid to you each year in your monthly checks is return of your original investment and some is earned interest. You only pay taxes on the earned interest portion.

Yes, insurance companies will discount the price based on your injury only for structured settlements. For example, a 30 year old woman has about a 50 year old life expectancy (she should live until 80). But if she is injured, the insurance company might conclude she has a 30 year life expectancy and reduce the price accordingly.

Doctors at the insurance companies review medical records and make a decision on the discount factor. Believe me, it is more of an art then a science. They all come to a different conclusion. If you take the best discount from the group, you are getting a very good discount.

Each case is different. Typically it varies between 5% and 60%, depending on the nature of the injuries.

Yes. They do not give this life expectancy reduction discount on regular annuity. So there are really 3 separate discounts given for settlement annuities. (1) No taxes. (2) General pricing discount. (3) Life expectancy reduction discount.

Definitely. Even though I’ve had training as a money manager, I couldn’t consistently match the returns of a structured settlement because of the big tax break given to structured settlements. Plus all the financial planning and worrying would be over. All I would need to do is spend the money that would be electronically transferred into my account each month.