Advantages of Structured Settlement Annuities
Structured settlements offer many advantages.
Availability of Funds When Needed
The timing of payments can be designed to meet financial needs and/or objectives as and when they are estimated to occur in the future (e.g., medical care, retirement fund, mortgages, short term liquidity, estate development and preservation, as well as other specific needs like college education).
Increased Protection from Dissipation of Recovery
As people are most familiar with receiving their income periodically rather than in a single lump sum, structured settlements facilitate sound financial planning. In fact, insurance industry statistics indicate that about 25% to 30% of all accident victims who receive lump sums completely dissipate their judgments or settlements within two months of recovery, and 90% of them spend it all within five years. In that regard, structured settlements, which involve agreed upon amounts and times of payments, protect against the dissipation risk associated with receiving a lump sum of money.
Tax Free Income Opportunity
If properly structured in accordance with existing tax statutes and regulations, all structured settlement payments will be received free from Federal income taxation. In contrast, a lump sum settlement, if invested, generally would produce taxable income.
Security/Minimal Investment Risk
Structured settlement payments provide a high level of security. The use of a highly rated life insurance company avoids the perils of an investment in the open marketplace. Furthermore, the periodic payments agreed upon at the time of settlement are not projections. They are contractually promised payments that will be paid in the amounts and at the times described in the settlement agreement. They are not dependent upon the future interest rates or other unpredictable factors affecting the value of alternative types of future oriented investments.
No Administrative Fees
The periodic payments will be free from any hidden administrative fees which would be involved in other types of investments, such as brokerage fees, investment advisory fees, trustee fees, accounting fees and, perhaps, additional legal fees.
A structured settlement “Life” annuity is the only investment that provides a mortality hedge. A person can never outlive a structured settlement life annuity, which pays until death regardless of when it occurs (actual lifetime). Lump sum awards, contrarily, are typically based upon a claimant's projected lifetime. Hence, claimants accepting lump sum awards must take great care to manage their principal in a manner that guards against outliving their funds. The lifetime payment feature available with annuities transfers this dissipation risk to a life insurance company.
Identifying Appropriate Structured Settlement Claims
The value of a claim is not the paramount factor in deciding whether to utilize a structured settlement. Rather, structured settlements should be considered whenever there is an opportunity to articulate a settlement package that removes some of the ambiguity and anxiety surrounding an injured person's future economic concerns. This opportunity can arise in a $10,000 claim or in a $1,000,000 claim. In general, however, structured settlements should be examined in the following kinds of cases:
- Death cases involving surviving spouses, parents, or dependents.
- Severe injury cases such as Traumatic Brain Injury (TBI) or Spinal Cord Injury (SCI).
- Claimant is a minor or incompetent.
- Claimant lacks money management skills.
- Claimant has no immediate need for money.
- Claimant has financial objectives unrelated to the injury.