What Is A Structured Settlement?

By: Ellie Gibb
Submitted: 2007-01-17 16:16:43
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So what is a structured settlement you ask. Well, let's start with some background information.

Up until a couple of decades ago a person who won a lawsuit as a direct result of a worker’s compensation claim, wrongful death or accident had to accept their compensation in a lump sum payment. It was assumed that the sum would be invested, with the beneficiary living off the proceeds for the duration of the recovery.

In some situations this kind of settlement works great while in others, the results can be disastrous.

Structured settlement offers a different pay out. It’s an alternative to a situation where a lump sum payout would be deemed undesirable. With a structured settlement there is an agreement between both parties that the payment will be made over time instead of in one lump sum.

It’s challenging enough for a person who has been through the trauma of an accident or illness to be forced to adjust to their new lifestyle without having to deal with worries over whether or not they have invested their settlement wisely.

Imagine you’ve been active all your life and then one day you find yourself confided to a wheelchair and now aside from coping with limited mobility you have thousands of dollars in assets to manage. Even most healthy people would find investing such a financial windfall somewhat overwhelming.

However with a structured settlement you don't need to hire someone to handle your investments. Plus, all the tax implications are eliminated.

Not only would it be costly to hire someone to oversee your investments but how would you know for sure if he or she was trustworthy? And what if that person was proven to be incompetent - where would that leave you? This is your life and your financial nest egg you’re dealing with.

With a structured settlement the two parties come to an agreement and the party responsible for the payment purchases an annuity. This annuity is often bought through an insurance company.

The biggest advantage of a structured settlement is that the injured party receives a steady income over several years or in some cases, over the course of their lifetime.

Structured settlement payments are regulated for inflation. In other words, the sum of all the payments distributed as part of the structured settlement would be greater than if the amount was paid in the form of a lump sum.

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

Ultimately, a structured settlement is a win-win for both parties. The injured party becomes the recipient of a steady stream of income and the party who is responsible for paying doesn’t have to concern themselves with monthly or annual payments.

That said, there are some situations like in the case of long term injury settlement where a structured settlement may not be the most ideal payment option.

It's important to do your homework before accepting a structured settlement. When you're talking about large sums of money it's always wise to weigh the pros and cons before signing on the dotted line.

Ellie Gibb is a freelance writer who writes extensively on personal finance matters. For more related structured settlement articles visit http://www.elliesstructuredsettlementinfo.blogspot.com

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