Structured Settlement is the special form of compensation amount payable for any form of damage done to a party (like injury by medical negligence) by another party against whom the victim files a lawsuit. The unique feature of this settlement amount is that it consists of one part of the amount paid to the claimant initially and the other part (the larger amount) is paid out to that party through installments instead of paying the whole compensation as a lump sum. These installments can be variable depending on the agreement between the two parties like – a smaller annual amount for next 20 years or a larger amount per year for next 10 years etc. The amount for initial few years could vary from the installment amount for years thereafter to the extent that the claimant can also choose to have no payments for few initial years and fixed annual installments thereafter to fund retirement needs.
Whatever be the arrangement, structured settlement comes coupled with its wide variety of benefits.
Overall Benefits offered by Structured Settlements
There are certain explicit and obvious advantages to the claimant by using the mode of receipt of payments through structured settlements. They are as follows:
- Guaranteed stream of Income to People – The Periodic Payment Settlement Act of 1982, ensures that the claimant receives a guaranteed income stream over the period of settlement agreed upon by the parties. Any such agreement is entered into in the presence of the court of law and has thus, all the legal backing required.
- Avoids windfall losses – For someone who has never handled too large an amount at once, chances are that the person might lose that lump-sum money due to his poor financial knowledge and bad financial choices. The claimant can avoid this risk by agreeing upon settlement of his claims through structured settlement wherein payment in annual installments ensures a continuous flow of income and avoids any risk of windfall losses due to a bad financial choice.
- Tax-free payments – The Internal Revenue Service Code Section 104(a)(2)assures that the settlement payments received by the claimant from the contract are tax-free and even the interest rate received on this amount are free of all taxes.
- Highly flexible to suit the needs of the claimant – These forms of tailored settlements are agreed upon by planning and negotiation . Thus the claimant can involve himself along with his attorney into the drafting of such an agreement to suit his financial requirements. There is no end to the possibilities and thus, the parties can devise payment schedules in any way that they want. As discussed before, the claimant can also choose to have no payments for few initial years and fixed annual installments thereafter to fund retirement needs
- Saves costs for both the parties – In the process of settling claims through structured settlements there are no overhead costs or hidden expenses involved. The parties involved are all benefitted because such settlement can be agreed upon even outside the courtroom without a trial if the parties agree on the terms of the settlement devised. This can even save upon the legal costs.
- No effect of external changes on settlement payments – There isn’t any effect of volatility in the stock market health or of fluctuations in interest rates on settlement amount. Moreover, the receipt of any other form of social security benefits does not affect the claimant’s right to receive the settlement amount in any way.
- Right to compensation even after the defendant’s death – Even if the original defendant party dies, the income to the claimant will not be hampered. It will continue like any other normal payments from the agreement!
- Selling off the settlement for lump-sum amount – The claimant does not need to be forever stuck with the agreed upon mode of receiving payments in case he wants the whole of the settlement amount together. He has the option of selling his structured settlement right to receiving money in installments to another insurance company or some cooperation that deals in structured settlements in return for the huge lump sum amount, slightly discounted, to suit his urgent financial needs.
- Secure and safe – The insurance company backing this stream of annuities is generally highly rated by the credit rating agencies so agreeing to a structured settlement obviously has a negligible risk. This makes these structured settlements secure and safe due to almost negligible risk.
- Built-in Inflation Factor – A structured settlement annuity offers the additional option to the claimants to receive the money as long as he lives and with an in-built inflation factor to guard him against rising prices with absolutely no additional costs or charges.
These benefits prove that structured settlement contract, if drafted keeping into account everyone’s best interests, can be beneficial to all parties. It can serve the financial needs of the claimant and can provide a guaranteed and risk-free income stream.