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What Is A Structured Settlement And How Does It Work?

Victoria Trix | Dec 29, 2009 |

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A structured settlement is an arrangement used mainly for the resolution of personal injury tort claims. Tort law encompasses all civil wrongs for which a person is able to receive compensation from the liable party. Tort law includes acts both intentional and negligent and generally defines what a "legal injury" is and whether or not compensation for said injury is called for.

How a Structured Settlement Works

A structured settlement is an alternative to the lump sum settlement used in the US. This type of settlement is paid through periodic installments rather than through one large payment. Most structured settlements are paid through annual installments, but it is also possible to be paid in larger sums every few years.

Laws and Structured Settlements

Because structured settlements have become so widespread, the US has created federal and state laws to regulate them. Additional laws such as those regarding Medicaid and Medicare also affect structured settlements, but those who receive structured settlements can often continue to use their Medicare and Medicaid benefits.

Benefits of a Structured Settlement

A structured settlement can provide the funds needed to cover medical bills, income lost from time off work, and other basic expenses that result from an accident or injury. If handled properly, it can also either reduce an individual's tax obligations or be entirely tax-free. While having extra money is in most cases a good thing, in the wrong hands it can be wasted or spent too quickly. A structured settlement helps to protect an individual from himself – the money cannot all be spent at once because it is paid over time. This feature is particularly beneficial for younger individuals; the money can be disbursed for college tuition and other major expenses.

Disadvantages of a Structured Settlement

In some cases, receiving periodic payments is not enough. For those who are severely disabled, large sums of money are sometimes required in order to purchase medical equipment or specialized vehicles. Other people may wish to use their settlement to purchase a home or pay off another large expense. One unfortunate item to consider in relation to structured settlements is the beneficiary's life expectancy. If the terms of the settlement state that payment will cease upon death, a significant portion of the settlement's value may be lost.

Selling a Structured Settlement

Even those who receive a structured settlement instead of a lump sum are still able to receive their money at once. About one third of US states still allow structured settlements to be sold. Companies who purchase structured settlements aim to profit from the transaction, so the offers they make may be rather low. Before selling a structured settlement, an individual should compare offers from multiple companies and to ensure that the one he chooses is reputable and well-funded.

Structured settlements are becoming very commonplace in US society, a society which seeks to gain profit wherever possible. Those who are injured in accidents or on the job are no longer forced to live in poverty, suffering from lost wages and medical bill-induced debt. A structured settlement provides an individual with a stable source of income for as long as the payment period lasts. Make sure that you understand the basics of a structured settlement before making any choices on your settlement as it can affect your future.