Structured settlements are used for a variety of reasons. The most common is to provide financial compensation over an extended period of time. This could include monetary awards that stem from lawsuits or to payout lottery jackpot winnings.
Structured settlements are commonly used to compensate victims of serious automobile accidents or injuries sustained in the workplace or caused by the negligence of another such as medical malpractice.
When monetary awards are provided through structured settlements, recipients of the funds are referred to as the Annuitant. Payments are guaranteed through an annuity held by a life insurance company and can be paid monthly, quarterly, semi-annually, or annually.
Insurance companies invest annuities to increase Annuitants’ financial portfolios. Annuity payments provided to compensate injury awards are tax-free. Annuities provided as lottery winnings may be subjected to state and federal taxation.
Considerable flexibility exists when establishing structured settlements. Payments can be arranged to meet the Annuitant’s financial needs. If Annuitants require special medical procedures, structured settlements can be arranged to pay additional funds to cover expenses.
Or, if Annuitants will retire within five years, but receives annuity payments for life, structured settlements can be established to provide additional funds at retirement. Once structured settlements are in place terms cannot be changed without court authorization.
The duration of structured settlements is determined through the courts or representing lawyers. Medical injury compensation is often settled out of court. Lottery winnings compensation is regulated by state lottery boards.
Structured settlement annuities might be paid for a predetermined time period or for life. However, “life” may actually refer to a specific number of years based on life expectancy of Annuitants.
When Annuitants are compensated for a specific period of time, payments are referred to as ‘period certain annuities.’ If Annuitants die before structured settlements are paid in full, remaining payments can be assigned to a beneficiary.
Annuities paid for life are referred to as life annuity structured settlements. Also known as ‘period certain’, life annuity settlements allow Annuitants to designate a beneficiary who receives remaining payments in the event of death.
A less common structured settlement is known as ‘lump sum’ annuities. This type of structured settlement provides a lump sum payment in the future and is well-suited for settlements involving minor children. The settlement can be structured as a ‘lump sum’ which allows transfer of annuity payments to a beneficiary, or as ‘life contingent lump sum’ which does not allow assignment of beneficiaries.
Two additional structured settlements include ‘life annuities’ which pay annuities for life, and ‘temporary life annuities’ which pay consistently for a specific number of years. With life annuities, Annuitants can elect ‘life only’ which offers no provision for assignment of beneficiaries, or ‘joint survivor’ which pays one beneficiary for the remainder of their life. Temporary life annuities end when Annuitants die and do not allow assignment of beneficiaries.
As you can see, there are many ways to use structured settlements. If you are entitled to monetary compensation due to injury or for lottery winnings, consult with a lawyer to determine which method provides maximum funds and minimal tax consequences.
Expert Law: The Structured Settlement Process