Structured Settlements are the compensation money to the claimant who suffers any form of personal injury and files a lawsuit against the other party, the defendant, who agrees to pay a settlement amount, and wherein at least a fraction of the total compensation amount is in the form of periodic payments scheduled by the structured settlement agreement. It was brought into force by the legal arrangement in 1983 which makes it an innovation in the financial and insurance arena. It has also become a popular settlement option in the insurance sector where the insured can claim the insurance money, in a structured way of receiving it in installments rather than as a lump sum amount.
Structured Settlements were first brought to the financial scene as a mode of claims settlement when in 1960s, a drug sold widely to treat morning sickness in pregnant ladies, called Thalidomide, caused huge deformities and birth defects in small children. This was for the first time in Canada that structured settlement was used to pay off the claims of a large number of the affected people since the drug manufacturer did not have enough money to settle all claims at once in lump sum amount.
To understand the concept better, consider the following example. For instance, a claimant may wish to be given $ 10,000 yearly for first 5 years and $ 15,000 for remaining 10 years (given the total compensation amount is $ 2,00,000). The claimant can also choose to have no payments for few initial years and fixed annual installments thereafter to fund retirement needs.
Who Should Use Structured Settlement?
In order to determine whether it is beneficial to both parties, it is important to understand who needs a Structured Settlement and when should they use it.
- Quite similar to that of infamous Thalidomide case, structured settlements are becoming popular with the settlement of claims for children who have suffered in injury in an accident or due to medical negligence. They not only assure that the child receives the benefits of the settlement amount but also receives a continuous flow of non-taxable income to support his needs. There are no costs for the child and the settlements are backed by top-rated highly credible insurance companies.
- For those who want to free themselves of any risk of windfall losses by receiving compensation money as a lump-sum which may all go down the drain as a result of a poor financial choice and wish to receive it as scheduled payments periodically which shall continue to be received by him with no tax liability as long as he lives, structured settlement is the answer.
- Besides, claimants who do not wish to have any tax liability on their settlement amount must also opt for structured settlements. According to the NSSTA (National Structured Settlement Trade Association), in order to make this form of compensatory mechanism more widespread, the Congress (United States) in 1982 laid down specific tax rules called the Periodic Payment Settlement Tax Act and the Section 104 (a) (2) of Internal Revenue Code stated that the whole amount of structured settlement would be tax-free to the claimant.
- If the person who has suffered a personal injury loss is nearing retirement and his settlement money exceeds $ 10000 in value, he must consider letting it be carried forward in form of periodic receipts in his retirement years or the successive years to ensure security of livelihood and guaranteed stream of income.
- In case of severe injury that leaves huge financial burden on the family to fund medical needs as well as take care of other pressing issues, structured settlements must be opted for as they best address the needs as regular source of income as long as the claimant is alive. Moreover in case of wrongful and untimely death of one of the spouse, the structured settlements can fund the basic monthly requirements of the surviving family.