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 of the larger amount which 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.
Despite the innumerable benefits of guaranteed income stream, no tax burden, flexibility and security of money in structured settlements, there are certain limitations of the same.
Limitations of Structured Settlements
There are certain limitations for the claimant by using the mode of receipt of payments through structured settlements. They are as follows:
- Periodic Payments trap – 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. It is entered into only by the consent of the court of law with adequate legal backing. But the claimant might feel trapped by the periodic payments after a point of time. This happens generally when the claimant is in urgent need of large sum of money. In such a case the smaller amounts received periodically may restrict the freedom of the claimant.
- Hidden costs involved – There are some hidden legal costs and expenses involved in the process of settling claims through structured settlements. The parties involved have to go through the proper trial by hiring a lawyer, preparing necessary legal documents, none of which is free of cost. Although the parties can be benefited 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. Yet, people seldom get into such a method and it is advised to follow all the protocols so as to maintain legal authenticity of the whole procedure.
- Lower returns as Compared to other Annuities – Claimants tend to agree upon periodic receipt of settlement payments through structured settlements and later tend to invest that money in other financial opportunities. But, this way, the claimant is at a loss by foregoing higher rates of return on investment he could have made with a larger lump sum instead of accepting a structured settlement.
- Completely inflexible once the terms have been decided – The structured settlements are tailored settlements which are agreed upon by proper negotiation . But it is important to note that once the terms have been decided and formally approved by the court, they cannot be changed in any case. This makes the structured settlements highly inflexible after the terms have been decided upon.
- Compensation ends after the claimant’s death – It is by law that 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. But, in case of the claimant, the matters are not the same. Once the claimant dies, there are no further payments. So, in such a case it is advisable for the claimant to agree upon a shorter period of time rather than stretching it for long.
The limitations offer an insight into how the structured settlement contract can be a big financial problem for the claimant despite providing a guaranteed and risk-free income stream. But apart from these demerits, there are certain financial as well as legal issues to be dealt with while going for structured settlement to settle claims.
Issues with Structured Settlements
There are certain issues with the structured settlements because they cannot satisfy the claimants in every possible way despite their wonderful concept and flexible design. They are as follows:
- Settlement Agreements may differ depending on the drafting company – The structured settlement agreement would depend largely upon the defendant entity company who is drafting it. Thus, in case it is a company with some regulations regarding drafting of such an agreement for claims settlement, the claimant must have complete information of any such rules and regulations of the company, which they usually tend to overlook.
- The claimant owns nothing in Disguise – The whole process of structured settlement payments is done legally where the claimant is a mere receiver of the settlement payments and thus, according to the tax code, the claimant does not own anything except the claim to the payment. In fact the claimant cannot be the owner of the policy otherwise the tax-free arrangement would not be applicable. The defendant passes on the money and right to make payments to an insurance company who in turn, pays the money periodically to the claimant. Thus, the insurance company holds the right of ownership of the settlement policy, not the claimant.