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What is a Structured Settlement?

 

A structured settlement is the form of damages that often results from a personal injury lawsuit whereby the plaintiff agrees to receive the awarded damages via payments over time, rather than a lump sum. Usually, this results in monthly payments over time and may include life contingent payments.
The recipient of the structured settlement is not the owner of the annuity policy. The defendant in the settlement pays a life insurance company to buy an annuity that pays out according to an agreed upon schedule. Structured settlements have become very popular and their primary benefits stem from the Periodic Payment Settlement Tax Act of 1982 (PPSA), codified in the Internal Revenue Code of 1986.
The most important benefit established is the tax free nature of the damages to the victim. Despite the fact that the victim does not own the policy, they have the right to the payments.
Structured settlements are originated by a broker who is paid a commission by the life insurance company that issues the annuity. The National Structured Settlements Trade Association or NSSTA is the lobbying organization that seeks to maintain the tax-free status of this settlement option.
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Why people have structured settlements

There are many reasons why a particular individual may have obtained a structured settlement as a result of their personal injury lawsuit, but in general the tax avoidance benefits established via the Periodic Payment Settlement Act of 1982 (PPSA) were chosen by legislators because they took a paternalistic view and desired to avoid lump sum damages.
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Structured settlements protect the plaintiff, too

By structuring damages over time, the plaintiff is protected from himself as dissipation of the funds can be avoided. Those who may not be responsible with a six, seven, or even eight figure settlement will have their damages last longer if it is within a structured settlement. While reasonable people may believe the damages belong to the plaintiff and they should have the right to utilize their money as they see fit, there are certainly a few scenarios where the structured nature of damages makes sense.
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Structured Settlements are especially good for minors

Commonly, the victim of the personal injury lawsuit is a minor. Depending upon the injury, it makes sense to structure the flow of funds to either provide future care for the disabled victim or delay funds until the minor is of age to pay for a college education or both.
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Be aware that brokers and providers profit

When negotiating a structured settlement, plaintiffs need to keep in mind that insurance companies make a nice profit off their annuity. Additionally, the broker arranging for the settlement has his eyes on a nice commission.
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Weigh your needs and motives

It is important that you think about your needs first and assess the advice you are receiving with an eye on the motive behind it. For instance, you may want more money up front so you can purchase a home to start building equity and invest in your future. Or, you may want to avoid being trapped by the periodic payments over time and have the optionality that a lump sum provides.
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Why should I sell my Structured Settlement?

Should you need to unlock the value of your future payments to satisfy a need today, the good news is that you may not need to sell your entire structured settlement or annuity. You can sell just a portion. There are several steps you should take before you sell structured settlement:

1. Answer these questions:

Do I really need cash now?

Is my need for cash now legitimate or am I just looking for short-term gratification?

If I sell some of my payments now, will that jeopardize my financial future?

2. Do your research!

Buyers

There are a number of structured settlement companies you can speak with about getting some cash for your payments, but you need to be aware of their approach. Some companies will encourage you to sell your entire annuity, even if you don’t need all of that money. When you come across this, be sure to move on. They are not looking out for your best interest.

What to sell

If you believe you should only sell a portion of your structured settlement, you should know you can always go through the process again should you have a need. There is no reason to sell more than you need to. Some people have sold payments more than 15 times off the same structured settlement, which is proof you do not need to liquidate your annuity in one transfer.

Beware of the companies that promise you the moon

These companies will give you an offer that may sound too good to be true. Many of these companies will not give you money in a timely manner. They delay paying as a way of, essentially, making money off the interest. Worse yet, these companies promising to beat any offer will treat you like a number, making it difficult for you to truly know the status of your transaction. Lastly, beware of the companies who tout their large financial backers. All of this money does not mean anything for you, the customer. These companies will charge the highest interest rate in the industry. Why? Because their large financial backers simply won’t fund a transfer at a lower rate.

What else?

There is much to know when you go to sell structured settlement, but it is also very simple. You should ask yourself some critical questions. You should conduct research to ensure you are making the right choice. Finally, be wary of those who offer you a ton of money and those who offer you very little but make a lot of promises. You need to work with a company who has done thousands of structured settlement transfers and understands that each transaction is different, because it is customized to the needs of the customer.