You won the lottery. Or a large amount of money paying blackjack at a casino. Or you sued someone to court on a damages count and they want to settle out of court by giving you a large amount of money. You could get all these monies in their lump-sums, as they are, or you could opt for a structured settlement.
What Is A Structured Settlement?
A structured settlement payment, in cases of law suits, is an arrangement between the plaintiff and the defendant or the defendant’s insurance company to pay the plaintiff their awarded amount of money in specified installments over a period of time. In cases of lotteries or game winnings, the arrangement could be between the winner and the insurance company of those paying the money, to be giving the money to the winner installmentally over a period of time. The arrangement to give and take the money is a settlement, and the manner in which the money is to be given is structured: thus, you have a structured settlement. These settlements are court-approved and are bound by a contract signed the the recipient and the insurance company funding the structured payments. The terms of the contract are explicit as to who the give the payments to and when, and those terms cannot be changed in the event of any unforseen circumstances.
Why A Structured Settlement?
You could go for the lump-sum, which is not a bad idea as long as you are conscious of how you spend it and you make good investments. A structured settlement, however, curbs the urge to spend just because one has the money. By keeping the money with the insurance companies and restricting the amount you get, as well as when you get it, encourages you to spend less and wisely, on those things that are important. Despite this, structured payments may not be used for investments, since they mostly do not come in lump-sums.
Is The Structured Settlement Still My Money?
The structured settlement still belongs to you and no one else. It is just being held in trust, in a manner of speaking, and given to you at intervals you have chosen. Plus, it is gathering interest as it is kept in that trust, because insurance companies place the payments in interest-bearing annuity accounts. Plus, you are the one who has dictated the terms of the payout of your settlement, and since those terms are difficult to change, that money will forever be yours. It is yours to do with as you please (when you get it, of course).
What Are The Disadvantages Of A Structured Settlement?
Of course something like this would have its advantages and disadvantages, but if you want the disadvantages first, then here you go:
- It is not tax-free if it is for anything other than injury. So a structured settlement for lottery winnings, emotional damage, or cases like that will be taxed. Also, attorney fees could be deducted
- One can sell their settlements, but doing so before the age of 59 1/2 will incur federal tax penalties and surrender charges
- If one does decide to sell their settlement, what they will get in cash would be lower than the actual worth of the settlement, due to discount rates
The Advantages Of A Structured Settlement?
There are some advantages as well, such as:
- A structured settlement is tax-free by law if it has been awarded for personal injury cases.
- It is a secure source of tax-free income
- If the designated recipient dies before the settlement payments are complete, the designated heir (this must be in the contract) will continue to receive the payments.
- Insurance companies are required to pay the settlement, no matter the economic situation on ground.