What is Structured Settlement?

A structured settlement is next best option to wholesome payments. They set the future stream of payments on a tax-free basis. One may take a certain amount in cash at the commencement and the party who has to pay, for example the life insurance companies pay a fixed amount at fixed intervals to the benefactor.

It saves a considerable amount of money as all the installments made are tax-free. In a structured settlement, all the future payments are tax-free, saving a considerable amount of money.

For instance, the life insurance company may assure $ 1500 every month for life with a 20-year guarantee. Even if the person dies prior to the expiry of the affixed period, the money will be made for all these 20 years.

How did Structured Settlements begin?

A study conducted by the Congress came out with a fact that many people who received large lawsuit awards because of physical injuries lost the money very quickly, usually within 5 years. This was because these people became 'rich' suddenly and so the friends and relatives approached them for loan and help. In case one refused, the injured was made to feel guilty.

Besides one also had to undergo added stress of investment. A large amount of money can indeed disappear amazingly fast.

What happened to these people?

These people were forced to turn to public assistance as many of them could no longer work owing to their injuries. They usually spent all their money on bad loans and investments.

How did Congress help the injured victims?

The ordinary non-professional investor was now given the choice of long term secured tax-free returns. Congress decided to remove all tax obligations for those who took future payments in a structured settlement. By removing your silent partner, the IRS, (who always has their hand in your pocket) the structure option looks very attractive. In essence, Congress wanted to make the long-term safe investment so attractive because of no taxes that you wouldn't want to miss the opportunity.

Didn't the government face a major loss in the lost tax revenues?

Yes, with over $50 billion in structured settlements since the early 1980's, the government has lost billions in tax revenues. Yet this proved to be a good public policy and rightly targeted the truly needy ones. The government anyhow saved in the deal as it saved billions, that otherwise would have been spent on public assistance to those who would have been broke after a few years.

Can anyone receive a Structured Settlement?

No. This sort of settlement is only provided to the ones who receive money because of a physical injury. It is available to less than even 1% of the population. Another thing that must be taken care of is that the structure must be purchased at the time of settlement. After the settlement agreement is signed it is too late.

Why does your site only offer estimated quotes and not real quotes?

A Structured Settlement is a highly custom and competitive product.  Each company offers varied services on negotiation basis and special offers to mark a cut above their competitors. Life expectancy discount for injured plaintiffs, special daily rate that is better than the book rates, are just a few to mention. So life insurance companies must make a custom bid on each situation.  So this site only offers estimates that can further be checked in detail. We request you to submit the information to us through e-mail, phone, fax or mail and we shall provide you with an accurate quote.

How much will this tax break be worth to me if I take a Structure Settlement?

As per the general rule of thumb, you are sure to save 25% to 35% in state and federal taxes. Also, each situation is unique and for exact savings the figures must be analysed. Say, you were to receive a million dollars paid slowly to you over time. You would keep the $250,000 to $350,000 that would normally go for taxes to the state and federal government.

What am I giving up if I take the Structured Settlement as opposed to all cash?

To receive the tax break, Congress said that the future stream of payments must be "fixed and determined" at the time of settlement. So you only loose some flexibility. Once the agreement is done, the payment stream, payment dates and amounts cannot be changed.

Why doesn't congress want you having flexibility?

Congress believes that flexibility is the root to several problems in the economic world. So they want you to trade your flexibility for a big tax break. Of course you can keep total flexibility by taking all cash. You can get around this somewhat by how you structure your payments.

How can one maintain flexibility and still qualify for a Structure Settlement?

For instance, consider a structured settlement that would pay you $3,000 per month for life. Now, if you take the second choice that would cost the same, and you $ 5,000 per month for 10 years only, it will pay you an a total of $600,000, absolutely tax free. You would have more flexibility because you get your money back quickly. After 10 years, no more tax-free payments. To maintain access to your cash, you would take advantage of the structured settlement for a shorter period.

How safe are Structured Settlements?

Absolutely safe. Some of the leading companies in USA with over $50 billion in assets offer this system. While some of them have now been in the top slot for over 100 years, some also have the highest possible rating from A.M. Best, Standard & Poor's, Moody's or Duff & Phelps.

Can I have my future payments Structured anyway I like?

Yes. The structure can be tailored to meet your needs. Usually we provide three structure options for you first to consider. You make changes on those to meet your needs.

What are the common payment streams in Structured Settlements?

Usually the users opt for a life annuity with a guarantee period. For example, $2,000 per month for life with a 20 year guarantee. Payments will be paid a minimum of 20 years and then for the life of the person thereafter.

What happens if I die before the 20 year guarantee period is over?

Payments will continue each month until the 20 years are over. Payments will be made to your estate, or your beneficiary if you named one.

What about inflation?

You can have your payments increase each year you are alive. For example, you may purchase an annuity with a 3% increase each year to fight inflation.

Why are life annuities most preferred?

Majorly because of the lifetime financial security they provide and because people want to transfer the risk of living a long time to an insurance company. No one can predict as to how long shall they live, and that is the key problem in one's financial planning. Consider a 65 year old with $200,000. If he spent $50,000 per year the money would be gone in about 4 years. If he spent $20,000 per year the money would be gone in about 13 years (with the interest). How much should he spend each year to live at the highest standard of living?

So this is mere logical reasoning?

Surely. With the structured system a person's standard of living is secured and the risks are transferred to the insurance company. Even if one grows hundred years old, he has in store a lifetime financial security.

What does insurance company benefit if he lives a long time?

The insurance company makes money on those who live shorter than expected and lose money on those that live longer then expected. In case the company looses money, law of averages applies.

A friend of mine looked at the structure offer and thought his investment manager could do better. Can he?

It is very unlikely. The investment managers need to do a lot better then the insurance company because of the taxes that will need to be paid. Insurance companies are intensely competitive and hire the best money managers available. Besides, only life insurance companies can offer life payments.

Is there anyway I can know for sure if the other investment manager can do better?

Why won't the investment manager believe that structured payments are tax-free?

Because structured settlements are rare, and are only are available for those with physical injury lawsuits. Many people haven't heard of them, including most investment managers. If he insists it can't be true, refer him to Section 104(a) and 130(c) of the IRS code.

I hear that lump sums paid every few years with life annuities are also popular. Why?

Yes. In such cases the payment is divided in two parts, monthly for the regular expenses and lump sums for investment or vacations. The lump sums are for special uses, such as vacations, major purchases, or to invest. With the lumps sums paid every few years, it is easy to plan for these events. For instance, a life annuity may pay $1,500 per month plus a $40,000 lump sum every 5 years.

Does the insurance company send me a cheque each month?

For those who would like to receive a cheque in the mail, the cheques are mailed out 10 days in advance of the due date. Though insurance companies always suggest you to opt for the electronic transfer where the amount is directly transferred into your account. You don't have to worry about your cheque then.

In case I have taken all cash, can't I buy an annuity with my money after settlement? It would give me more time to make up my mind.

Yes. But it is not a structured settlement annuity and so you would have to pay taxes on it. Also, the rates are not as good. So, not only do you pay more for the annuity, you pay taxes as well.

Why are the rates better for structured annuities then for regular annuities?

Life expectancy, competition, premium taxes, this has a number of reasons involved. Consider an insurance company that offers both regular as well structured annuities. It will charge 4.9% more to same healthy person for a regular annuity. So you pay more and pay taxes.

Annuities are often advertised as 'tax deferred'. What's the difference and comparability?

The tax deferred language they use is somewhat deceptive. Tax deferred annuities are the same as regular annuities. You are taxed each year with a regular annuity, though some of the money paid to you each year in your monthly cheques is return of your original investment and some is earned interest. You only pay taxes on the earned interest portion.

What are the other benefits of structured settlements?

Yes, insurance companies will discount the price based on your injury only for structured settlements. For example, a 30-year old woman has about a 50 year old life expectancy (she should live until 80). But if she is injured, the insurance company might conclude she has a 30-year life expectancy and reduce the price accordingly.

How do the insurance companies decide how much to discount the price?

The insurance company has its own team of doctors who review medical records and make a decision on the discount factor. It is more of art than a science. They all come to a different conclusion. If you take the best discount from the group, you are getting a very good discount.

How much of a discount do they give?

Each case is different. Typically it varies between 5% and 60%, depending on the nature of the injuries.

Is this in addition to the price discount from a regular annuity mentioned above?

Yes. They do not give this life expectancy reduction discount on regular annuity. So there are really 3 separate discounts given for settlement annuities. (1) No taxes. (2) General pricing discount. (3) Life expectancy reduction discount.

Would you buy a structure settlement if you had a chance?

Definitely. Even the money managers couldn't consistently match the returns of a structured settlement mainly because of the big tax break given to structured settlements. Plus all the financial planning and worrying would be over. All I would need to do is spend the money that would be electronically transferred into my account each month.