Structured Settlements FAQs
Structured Settlements FAQs
Can I use structured settlements as collateral for a loan?
Generally, the answer is no. The laws regarding structural settlements are designed to protect you from abuse, and the ability to use structured settlements as collateral would void that intended purpose. The payments however, can be claimed as a form of income so that if you want to buy a house, the payments represent the same financial ability that a take home paycheck of the same amount would provide.
Once in place, can structured settlements be traded back for a lump sum settlement?
No. You are given special tax treatment with regard to structured settlements' proceeds, and you cannot then take that in a lump sum fashion and invest it again.
Do I get interest on structured settlements?
No. The interest is a part of your structured settlement agreement and is therefore, tax-free. You do not then get interest on top of that. This however, is not to say that if you get your regular structured settlement payment and don’t spend all of it, that you cannot invest that remainder into another account and draw interest from that. That interest however, would be taxable.
I see ads for turning my cash payments into a lump sum. Is that like renegotiating the structured settlement?
On the surface, they may sound the same, but they are not. Structured settlements may not be paid out in any different fashion than initially agreed upon. What these ads talk about is selling the payments to them. They would receive the payments just as you would have over time.
What they do for you is to buy them for a far lesser amount than the gross proceeds than you would get over time. Remember though that they are taking certain risks that are attached to inflation, and they also need to make money in the transaction. Consequently, the amount that they give you will be substantially less than the face value of the structured settlement. Structured settlement buyouts ads sound like they are giving something nice. But this is real business and you most certainly lose money long-term in exchange for getting it sooner.
Depending upon the term of structured settlements and the company making the offer, you may lose 50% of the total amount to be paid to you over the long run. If you need to go this route, don’t settle for the first deal that comes your way. Talk to as many companies as you can find and let them know that you are checking many deals. They are not all the same.
You should also seek the advice of your attorney before signing anything or taking any payment from anyone. Structured settlements can have many different requirements and are subject to different laws. Before you enter into any agreement regarding your structured settlement, you want to make sure that you don’t put yourself in legal trouble or find that there are things that you are agreeing to that are not in your best interests.
Questions about Structured Settlements
What is a Structured Settlement?
A structured settlement is a future stream of payments that is paid tax-free to you. Instead of taking all cash at the time of settlement, you have a second option. You can take less cash and a future stream of payments paid by a strong life insurance company. Splitting your award between up front cash and a future stream of payments is called a structured settlement. In a structured settlement, all the future payments are tax-free, saving a considerable amount of money. An example of a future stream of payments is $2,000 per month for life, with a 20 year guarantee (will pay a minimum of 20 years even if person dies prior to 20 years).
How did Structured Settlements begin?
Congress did a study and found that many people who received large lawsuit awards because of physical injuries lost the money very quickly, usually within 5 years. Besides dealing with the stress of their injuries, many injured people faced the added stress of investment or loan requests from relatives, friends and neighbors. Many discovered that they were made to feel very guilty if they did not help these people out, after all, they were now "rich". A large amount of money can disappear amazingly fast.
What happened to these people?
Many of them could no longer work because of their injuries, and they had now spent all their money on bad loans and investments, they were often forced to turn to public assistance.
What did Congress decide to do?
Congress saw the necessity to protect ordinary, non-professional investors by having the option for long term, very safe investments with good 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 this tax-break cost the government billions of dollars in lost tax revenues?
Yes, with over $50 billion in structured settlements since the early 1980’s, the government has lost billions in tax revenues. But it is good public policy because it has helped the truly needy. The government has also saved billions on public assistance to those who would have been broke after a few years.
Can anyone receive a Structured Settlement?
No. Only those who are receiving money because of a physical injury. So this is available to less then 1% of the population. Also, those who are injured must purchase the structure 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. Many companies offer a life expectancy discount for injured plaintiffs and also a special daily rate that may be better then the book rates. So life insurance companies must make a "custom" bid on each situation. That is why an estimate can only be offered on this site. You are encouraged to submit the information to us via e-mail, phone, fax or mail so that we can provide you with an accurate quote.
How much will this tax break be worth to me if I take a Structure Settlement?
As a general rule of thumb you will save between 25% and 35% in state and federal taxes. Each situation is unique and has to be analyzed to figure exact savings. So if 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. The payment stream can't be changed after settlement. So you lose some flexibility in that the payment dates and amounts cannot be changed.
Why doesn't congress want you having flexibility?
From Congress’s point of view, it is the flexibility that gets people into trouble in the first place, so Congress wants 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 would you maintain some flexibility and still qualify for a Structure Settlement?
Let’s say you are looking at a structured settlement that would pay you $3,000 per month for life. Instead you decide to take a second choice that cost the same, and pays you $5,000 per month for 10 years only. The second option would pay you tax free a total of $600,000 over 10 years. You would have more flexibility because you get your money back quickly. However, 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?
Very safe. Some of the biggest strongest companies in America offer structured settlements. Some of these companies have over $50 billion in assets and have existed 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 is the most common type of payment streams in Structured Settlements?
People generally choose 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 the most popular?
For the lifetime financial security they provide and because people want to transfer the risk of living a long time to an insurance company. The hardest part of financial planning is not knowing how long you will live. As an example, let us look at 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?
It would be anybody’s guess, wouldn’t it?
Exactly. That is why he should transfer the risk of living a long time to the insurance company. Even if he lives to be a hundred years old, his standard of living is protected. It removes a lot of stress knowing you have lifetime financial security.
So how does the insurance company make money if he lives a long time?
In this case the insurance company would lose money. They play the law of averages. The insurance company makes money on those who live shorter then expected and lose money on those that live longer then expected.
A friend of mine looked at the structure offer and thought his investment manager could do better. Can he?
It is very unlikely. If you gave the cash to the investment manager, he has 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?
Yes. Take the structure proposal you like to the investment manager and see if he can offer a better price for the same stream of future payments with equal safety. Be sure and tell him that the payments in the structure proposal are all tax-free, because he won’t believe it. After 16 years, I have never seen an investment manager make a better offer in writing.
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. For example, someone may have a life annuity that pays $2,000 per month plus a $50,000 lump sum every 5 years. People often like to divide their money into two parts. The monthly payment often just covers general expenses. 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.
Does the insurance company send me a check each month?
Insurance companies encourage you to sign up for electronic transfer directly into your account. You don’t have to worry about your check then. For those who would life to receive a check in the mail, the checks are mailed out 10 days in advance of the due date.
Can’t I buy an annuity with my money after settlement if I take all cash? 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?
There are a number of reasons that have to do with life expectancy, competition, and premium taxes. As an example, insurance company X offers both regular annuities and structured annuities. This company will charge 5.9% more to same healthy person for a regular annuity (in this case a 60 year old woman). So you pay more and pay taxes.
I’ve seen annuities advertised as "tax deferred". How do they compare?
Tax deferred annuities are the same as regular annuities. The tax deferred language they use is somewhat deceptive. You are taxed each year with a regular annuity. However, some of the money paid to you each year in your monthly checks is return of your original investment and some is earned interest. You only pay taxes on the earned interest portion.
Any 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?
Doctors at the insurance companies review medical records and make a decision on the discount factor. Believe me, it is more of an art then 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 though I’ve had training as a money manager, I couldn’t consistently match the returns of a structured settlement 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.
What is a Structured Settlement?
Structured settlements are a unique and innovative method of compensating injury victims (“claimant/plaintiffs”) using streams of payments, exempt from gross income taxes, which are tailored to meet the claimants/plaintiff’s future medical expenses and basic living needs. Encouraged by the U.S. Congress since 1982, structured settlements are mutually agreed upon between the claimant/plaintiff and the defendant and/or the defendant’s insurer at the time of a tort settlement. Structured settlements are a proven, effective solution for the needs of the claimant/plaintiff, and are promoted by judges, attorneys, claims professionals, and the public at large.
• A structured or periodic payment settlement is defined as: "Any series of payments made other than a single lump sum amount, at the time of settlement.”
• It is a financial package designed for the plaintiff, and is agreed to be paid by the defendant or its insurer. It is limited only by the ingenuity of those involved. In its most fundamental form, a defendant or its insurer agrees to make future periodic payments to the plaintiff. Once this has been accomplished, in most instances, the defendant then funds his obligation by the purchase of an annuity.
What are the benefits of a Structured Settlement to the claimant/plaintiff?
Structured settlements provide guaranteed streams of income to the claimant/plaintiff that are completely tax-free. The claimant/plaintiff avoids the risk of mismanagement of their funds which can result in financial loss and hardship. This security and stability enables the claimant/plaintiff to have peace of mind, knowing that their payments will be received on the scheduled dates, and further allows them to tailor the annuity to meet their specific life needs in the future. With the use of a lifetime annuity, a claimant/plaintiff can ensure that he/she will never outlive the stream of income as the payments will continue until the time of death.
What are the benefits of a Structured Settlement to the defendant/insurer?
Structured settlements allow the defendant/insurer to evaluate their cases by analyzing what it would cost to fund an annuity which will take care of the claimant/plaintiff’s future medical expenses, lost wages, and any additional future expenses. The defendant/insurer can become more creative in their negotiations with the claimant/plaintiff through the use of structured settlements, including the involvement of an Atlas Settlement Group representative during settlement discussions. In addition, the use of structured settlements elevates the probability of timely settlements which in turn reduces the costs of litigation and the risks of a jury trial.
What is a “Qualified Assignment”?
The defendant and/or the defendant’s insurer may transfer the obligations to make the future periodic payments to a third party through the use of a “Qualified Assignment”. In this process, the future obligations are transferred from the defendant and/or the defendant’s insurer, to an affiliated institution of the life insurance company where the annuity has been placed. Upon the execution of this assignment, the defendant and/or the defendant’s insurer can close its books on the case. This assignment is referred to as “Qualified” because it enables the claimant/plaintiff to receive favorable tax treatment under IRC Section 130(c), which will be discussed later. This process benefits the claimant/plaintiff because the assignment company specializes in structured settlements and may offer additional financial security. In addition, this process benefits the defendant and/or the defendant’s insurer because it relieves them of future responsibility for the periodic payments.
What are the Federal Tax Rules which govern the use of Structured Settlements?
In the Periodic Payment Settlement Act of 1982, the U.S. Congress adopted specific tax rules to encourage the use of structured settlements to resolve physical injury tort cases. Internal Revenue Code Section 104(a)(2) was amended to clarify that periodic payments constitute damages which are tax-free to the injured party. Furthermore, Internal Revenue Code Section 130 was adopted to provide a process where injured parties could receive a stream of income into the future from a financially secure and experienced institution through a “Qualified Assignment”. In order to protect the public, Congress specified in IRC Section 130 the requirements to establish a qualified assignment:
• The Assignee assumes the liability from the defendant and/or their insurer
• The payments are fixed and determinable
• The payments cannot be accelerated, deferred, increased or decreased, or otherwise altered after the agreement is finalized
• The Assignee’s obligation is no greater than that of the defendant and/or their insurer at the time the agreement is finalized
• The periodic payments are excludable from the claimant/plaintiff’s gross income under IRC Section 104(a)(2)
• The injury must be a result of physical injury or sickness
• A qualified funding asset, i.e. an annuity or U.S. Government obligation, must be used to fund the periodic payments
In what types of cases can a Structured Settlement be used?
The traditional tax-free structured settlement can be used in any case resulting in physical injury or sickness to the claimant/plaintiff as a result of a tort action. It can also be used in wrongful death actions, where surviving family members are involved in litigation. In most states, traditional structured settlements can also be used in Worker’s Compensation cases; however, the use of Qualified Assignments needs to be evaluated on a case-by-case basis due to specific state and federal regulations.
Cases involving minors should always consider the use of a structured settlement, as it provides payments to coincide with important life events such as college, the need to purchase reliable transportation, a home and start a family.
An increasing number of Non-Qualified Structured Settlements are being used in cases such as property damage, environmental clean-ups, employment cases, real estate and business transactions, and other litigated matters. The tax implications for these matters is different, as the yield is paid in tax-deferred fashion, rather than a tax-free form. For more information on Non-Qualified Structured Settlements, please contact an Atlas Settlement Group representative.
How do I know that I am getting the best annuity available?
With access to every life insurance company in the structured settlement marketplace, Atlas Settlement Group guarantees that the best annuity rates will be provided to the claimant/plaintiff along with the name and ratings information of the life insurance company where the annuity would be placed. In addition, Atlas Settlement Group will provide you and your attorney with benefit comparisons of the other similarly rated life insurance companies.
What would happen to my Structured Settlement and annuity payments in the event of my death?
Most annuities guarantee benefits whether the claimant/plaintiff is living when a payment is due or not. Even annuities that provide a lifetime income can be established to provide a guaranteed period for a certain minimum number of years. For example, an annuity providing monthly payments for life with a guarantee period of 20 years would pay for at least the first 20 years. If the claimant/plaintiff were to die after five years, the monthly benefits would continue to the claimant/plaintiff’s beneficiary for the remaining 15 years of the guaranteed period. If the claimant/plaintiff lives past the first 20 years, the monthly payments would continue until his/her death. Period certain annuities and lump sum payments are guaranteed regardless of whether the claimant/plaintiff is living or not; any payments to be made after the death of the claimant/plaintiff would be paid in full on the scheduled dates to the designated beneficiary.
What happens if the life insurance company my annuity is placed with goes out of business?
Structured Settlements are perhaps the most secure and conservative investment vehicle available to claimants, thus the universal support for the product by all parties. While the primary obligation to make the identified payments falls upon the life insurance company to which premium was submitted, secondary guarantees are in place to ensure funding in the event that the primary company becomes insolvent. In the unlikely event that the primary life company were to default, payments would be assumed by the secondary company, ensuring structured settlement payments are made on time.
What does Atlas Settlement Group charge for their Structured Settlement services?
Atlas Settlement Group is paid commissions directly from the life insurance companies where the annuities are placed. Accordingly, our services are free of charge to claimants/plaintiffs, defendants/insurers, attorneys, claims professionals, or any other party who engages our structured settlement services. This begs the question “Why wouldn’t we get Atlas Settlement Group involved?” as it does not affect the expenses any party has in the case. Where else could you receive professional services for free?