Structured Settlement Investments

Structured settlement payments are a form of financial compensation award whereby the payment is made as a series of periodic payments rather than as a single payment upon receipt of the award. This can take the form of significant payments when a beneficiary reaches a certain age, such as a 21st birthday, or it could form smaller monthly payments over many years or even decades. The payments are typically in made in lieu of a successful personal injury or workplace compensation award. They are often made when the beneficiary is a minor or otherwise considered vulnerable, and may not be considered best able to manage receipt of a large lump sum of money at a given time.

The terms of structured settlements are negotiated between the parties at commencement, and in some instances the financial priorities or needs of the beneficiary will change over time. In the event the beneficiary wants more or all of the funds in the payment plan earlier than scheduled, they have the option of selling part or all of their future payments in return for an immediate lump sum payment. A characteristic of selling the periodic payments in return for a lump sum is that the seller will not receive the full notional amount of the total payments. For instance, if the award provided for a sum of $400,000 to be paid in equal annual instalments over 10 years, if the beneficiary sold the right to receive the payments soon after the award they may for instance only receive a payment of $300,000.

When sold on the investment markets, the right to receive the payments are known as structured settlement investments. Essentially the investor is the party on the other side of the trade from the seller. Inside the investment markets they are considered to be Secondary Market Annuities, or SMA’s. SMA’s are considered to offer comparatively high yields and low risk compared to other annuity products. It should be appreciated that each SMA is unique and the payments receivable are specific to the individual structured settlement being purchased.

The higher yield payable from these investments is not reflective of a greater risk, but is rather reflective of lower liquidity. The terms of the payments were tailored to the requirements of the beneficiary at the time of the award, and often will not provide for equal periodic payments over long periods of time as is typical with a conventional annuity. Participants in these markets should also be aware that before they can be sold Court approval is required, and the remit of the judge is to ensure the beneficiary of the award is fully aware of the implications of the transaction and that the terms of the sale are equitable to all concerned.

Questions and Answers on Structured Settlements

Q: What are Structured Settlements?
A: If you have been involved with a lawsuit involving personal injury settlements, your attorney may suggest that you consider structured settlements. This is when your case involves settling for a large amount of money, and often the other side’s attorney will offer a plan for you to receive the settlement amount over a proposed period of time, rather than all at once in a lump sum. The payouts can range from an annual payment over a period of 10 years, for instance, to perhaps a payment twice a year. The party who is settling with your regarding your personal injury settlements will purchase an annuity which guarantees the full payment over time.

Q: Would I Benefit From Structured Settlements?
A: Avoiding a large tax impact can be one of the main benefits of accepting lawsuit payments through structured settlements. When properly organized, your tax obligations in regard to the amount you have received from the personal injury lawsuit settlement may be reduced, or in some cases may even be tax free. Someone who has been severely injured and will have years of on-going medical care and special needs may benefit from this type of settlement. In a situation of a wrongful death case where there are young children, structured settlements may be utilized to pay for the cost of college in the future.

Q: What are the Drawbacks of Structured Settlements?
A: You may not borrow against the future payments of your personal injury settlements. For instance, let’s say you’d like to purchase a home. If you receive an annual payout this may help for your income qualifications on the house, but you cannot access the annuity to put a down payment on the property. The amount of return on the annuity may be less than the amount you may be able to receive if you were managing the full settlement yourself.

Q:Is it True I Can Sell My Structured Settlements?
A: Yes, this can many times be done. There may be laws or restrictions which will come into play. Certain insurance companies which are handling the lawsuit payments may have restrictions on a sale to a third party. This can be an arena where unscrupulous business are shopping for a good deal, and offer you a low amount, but for a quick payout. Annuity buy outs are not always the best answer, and often may need to be approved by the court. At the very least, seek the advice of your personal injury attorney before entering into an agreement to sell through annuity buy outs.

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