Explanation of Structured Settlements

By: Kenneth Conger
Submitted: 2007-01-17 16:17:15
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Before you can make a decision on whether you want a lump sum or monthly payments you first need to know what a structured settlement is. Let's break the terms apart and give a quick description of each.

Settlement:

If you were involved in an accident at work (workers compensation claim), been involved in an automobile accident, or a wrongful death case and won that lawsuit then you were awarded a settlement. If the amount was small it would have been awarded to you in a lump sum. If it was a rather large amount then it would be awarded to you in a Structured Settlement.

Structured Settlement:

Roughly 20 years or so ago if you had won a lawsuit the cash payout was in the form of a lump sum. It was felt by many that the injured plaintiff would wisely invest that money so they would have an income for the rest of their lives. As it turns out that was not the case in several situations. Therefore, lawmakers decided that large sums would be distributed on a periodic basis; monthly, quarterly, annually etc. etc. An agreement was made between the injured party (plaintiff) the lawyers (for both sides) a Financial advisor and the defendant. It then had to be determined how the payments would be distributed and this was called Structured Settlement Annuity.

Structured Settlement Annuity:

The defendant in large cash sum cases would purchase an annuity for the distribution of funds through an Insurance Company. This distribution then allows for the plaintiff or beneficiary to live off the proceeds for the duration specified or for the duration of recovery.

The structured settlement annuity is the alternative when the lump sum is undesirable. The challenge to deal with the after effects and worries of an accident, illness, or death of a family member and being forced to adjust to your new lifestyle, is enough without having to deal with the troubles of whether or not you have wisely invested your settlement.

As an example; you have always lived an active lifestyle and now you are confined or bedridden for an unknown amount of time. Having to manage thousands of dollars in assets could be overwhelming. Even healthy people find investing a large cash disbursement rather intimidating.

With a structured settlement annuity your investments will be handled by a qualified and trustworthy company. Your tax implications could be reduced if not eliminated entirely. Can you imagine the implications if you had hired an individual who was not competent or trustworthy. You have to remember this is your money that you possibly may need to survive on for the rest of your life.

With the structured settlement you receive a steady income for several years and in some cases your lifetime. Inflationary demands are calculated in the scheduled payments. In other words, if you could calculate all the payments at the end of your structured settlement payment cycle, you would discover that they surpass any amount you would have received in a lump sum.

Since the payments of the structured settlement were purchased up front as an annuity, the responsible party actually pays less than the sum of all the payments.

Ultimately, with structured settlements both parties are in a win-win situation; you become the recipient of a constant flow of income (possibly for life) and the responsible party for paying doesn't have to worry themselves with monthly or annual payments.

Article source: Expert Articles