A structured settlement is a regular flow of tax-free payments that are granted to the plaintiff in a civil lawsuit. Structured settlements are intended to provide long-term financial security for the injured party. If the amount of money is small enough, the injured party may have the option of receiving a lump-sum settlement. The process of issuing a structured settlement is complicated and results in a simpler and easier solution for someone who wins a case.
What is a structured settlement annuity? A structured settlement is defined as a derivative and negotiated agreement of a person or company that wins a civil case. A settlement generally includes a lump sum of cash upfront (cash advance), once, to cover immediate expenses, followed by guaranteed, tax-free, periodic payments customized to meet the needs of the settlement winner. If a court proceeding determines that the plaintiff is owed money, it may be considered a structured settlement rather than a lump sum. Although many beneficiaries of a structured agreement find that the agreement is tailored to their needs, some may experience changes in financial circumstances and cannot obtain funds through conventional financing or other sources.
In the United States, structured settlement laws and regulations have been enacted at both the federal and state levels. Secondary market annuities occur when a third-party company gives the agreement owner a lump sum of money for payment of the structured settlement. Facing a crisis such as foreclosure or not having transportation to get to a job, many structured settlement owners decide to sell part or all of their payments. Disclaimer* The videos below are for educational purposes and are not a sponsorship of the life insurance company.
It's important to weigh the pros and cons of agreeing to a structured agreement in relation to your unique circumstances. The defendant, or his insurer, may assign its periodic payment obligation to a qualifying assignment company (usually a single-purpose subsidiary of a life insurance company) that funds its assumed obligation with an annuity purchased from its affiliated life insurer. The Federal Periodic Payment Settlement Act of 1982 made court approval mandatory for all sales of structured settlements to ensure that the best interest of the consumer comes first and limit any party from taking advantage of the receiver of the settlement. Thanks to the Periodic Payment Settlement Act of 1982, many annuities issued as part of a structured settlement agreement, defined by the IRS as “qualifying financing assets,” are exempt from income taxes.
There are 47 states with structured settlement protection laws, created by a model enacted by the National Conference of Insurance Legislators (NCOIL). A structured agreement can be used in conjunction with settlement planning tools that help preserve the claimant's Medicare benefits. Therefore, structured agreements were used more to ensure that money was withheld and used for child care as prescribed by the court. Some municipalities even have stricter regulations and are generally in areas where there is a larger population at risk with structured settlements.
A structured settlement under the terms of the tax code is an agreement that meets the following requirements.