Structured settlements are simple. Many lawsuits result in someone or some company paying money to another to right a wrong. Those responsible for the wrong may agree to the settlement on their own, or they may be forced to pay the money when they lose the case in court.
Structured settlements come with pros and cons but are pretty straightforward because they’re exactly what it says in the name. They come from lawsuits involving personal injury or liability, the majority of the time. They nearly always come as a result of a defendant settling out of court, rather than taking the issue to trial.
A structured settlement is exactly the same as a lump sum, except the amount is paid out in installments, rather than all at once. These are deferred payments and can be paid out in any way you see fit.
Annuities are financial instruments with qualities of both investments and insurance policies. They are a contract between an individual and an organization that provides for the repayment of a premium after a given time period has elapsed. Annuities date back to ancient Rome, where the first concept of this financial tool was introduced. “Annua” actually meant annual stipends in Latin. Individuals would give contributions into a large pool of money run by each province and then receive an annual payment each year until death, or for a specified period of time. This allowed the Roman Empire to mitigate risk while providing money to individuals of priority, such as soldiers and generals who often saw combat.
Investing Into A Structured Settlement Annuity
The inspiration for today’s blog post has been a series of inquiries I’ve received from other planners over the past month, whose clients are being solicited to invest in structured settlement annuities, but have been understandably wary of the purported “high fixed return with low risk” offering. After all, most returns that seem “too good to be true” for their risk are in fact too good to be true, and entail higher risk than what is first apparent. Yet due to the unique way that structured settlement annuities work, the reality is that higher yields are not actually a high risk premium, but a low-risk low liquidity premium.
A LOOK AT STRUCTURED SETTLEMENTS
Structured settlements are exactly what they sound like. These are generally the result of a lawsuit involving personal injury or liability, and represent an award in the plaintiff’s favor. The defendant has been found guilty or has chosen to settle rather than go to trial. The settlement amount has been converted from a lump sum into a series of payments over time. These are called deferred payments.
For Your Protection
The IRS is only involved with structured settlements because they want to make sure that the person receiving the settlement gets all of the money. The Payment Settlement Tax Act of 1982 prevents anyone from taking money out for taxable purposes. However when getting cash for settlement options, these will be taxable. You must make a decision regarding if selling is the best choice or not.
All companies that handle these types of cases will require payment of some form, and will be the insurer of the settlement once it’s sold. Most companies will sell these, but their pricing may vary and research must be done. The research will help to decide which company will work best for you and give you the most money for your settlement. When the case comes before a judge, they will look at everything to include the price that your company will be charging. If they feel this is not a fair deal for all parties, they will then deny the case.
What’s wrong with structured settlement annuities? In some cases, a structured settlement annuity can make perfect sense for severely disabled persons who will need monthly income to care for their medical and rehabilitation needs for the rest of their life. However, even in those relatively few cases where a structured settlement annuity makes sense, there are hidden costs and deceptive marketing practices used by the liability insurers and life insurance annuity providers.
What are the hidden costs of a structured settlement annuity? Although the written proposals for structured settlement annuities will say nothing about this, there is a four percent commission taken by the life insurance annuity provider. The four percent commission is the standard commission charged by all life insurance annuity providers for their services and the commission is the same for every structured settlement annuity. If for example, the initial amount of money that is spent to pay for the annuity is $1 million, you will be charged a $40,000 commission by the life insurance company. That’s a lot of money for the routine task of establishing an annuity.
If you have a structured settlement you have a right to sell your payments. Facing a crisis like foreclosure or not having transportation to get to a job, many structured settlement owners choose to sell some or all of their payments. When a structured settlement is set up, it’s typically tailored to meet the needs of the injured or surviving person. Unfortunately sometimes those needs change and the structured settlement owner needs access to his or her money right away. Selling future payments allows someone to get access to the money they need quickly.
Federal and state laws exist to protect consumers against unscrupulous companies. People who need quick access to the funds tied up in a structured settlement turn to purchasing companies to buyout their future payments in exchange for a lump sum. Unfortunately, there are companies out there waiting to prey on people who are in a desperate situation.