The Structured Settlement Industry was created in the 1970Ís because of Internal Revenue Service rulings. In a structured settlement, the defendant/insurance carrier agrees to provide injured parties with certain periodic payments. A structured settlement results in the release of claims against the defendant in exchange for the promise by the defendant to make a stream of future payments to the injured party. A structured settlement may also include an immediate, up-front cash payment to the injured party at settlement as well as future lump sum payments.
In essence, the term "structured settlement" encompasses virtually any payment scenario other than the traditional lump sum cash payment. In contrast with the lump sum cash payment, a structured settlement consists of the periodic payout of the settlement amount to help the claimant meet economic needs over time.
In any given structured settlement, the payment scenario might provide any of the following or a combination thereof:
- An immediate cash payment for lost wages, incurred medical expenses, special equipment or home modification.
- Attorney fees in an immediate cash payment or structured over a period of years.
- Monthly income designed to replace lost wages payable for a fixed number of years or for life and guaranteed for a period certain.
- An annuity consisting either of monthly or annual payments designed to provide for future medical or rehabilitative expenses through a medical trust.
- A series of payments to fund future educational expenses.
- Life insurance to provide for children in the event of premature death of the surviving parent.
- Future lump sums that serve as inflation stabilizers or opportunity lump sums that fund major purchases.
This flexibility creates virtually unlimited opportunity to achieve a unique settlement for each claimant. The structured settlement can be very simple or quite complex. The complexity of the structure and the ability of that structure to meet the needs of the claimant are limited only to the creativity of the consultant and parties involved and the financial instruments available in the structured settlement annuity market.
How Structured Settlements Are Funded
Most structured settlements are funded by a purchase of a single-premium annuity from a life insurance company by the defendant or its insurer. Annuities that pay fixed amounts over a life time or a certain period of time are the most common method of funding the settlement. The annuity premium is paid directly to the life insurance company issuing the annuity contract. Another alternative available for funding a settlement is a trust fund, which invests only in U.S. Treasury Obligations (Bonds).
An annuity is defined as a regular payment made over a fixed period or for the duration of a designated life or lives. Originally, the word annuity referred to an annual payment. Now, the term includes monthly, quarterly and semi-annual payouts. Under an annuity contract, the life insurance company, or its assignee, assumes the liability for the payment from the defendant.
Criteria for Structured Settlements
One or more of the following criteria might be used to determine if a structured settlement is appropriate for a claimant’s situation:
- A loss amount greater than $10,000 and an opportunity to defer some of the payments for three or more years.
- Involvement of a minor child and a loss of $5,000 or more.
- The claimant’s desire for security and the peace of mind gained from receiving a steady stream of income over a long period.
- The claimant’s experience and comfort with managing large sums of money over time.
- The desire of the claimant to shelter the settlement.
- The severity of the claimant’s injuries and future care needs.
