If you find yourself in a situation where you’re claiming compensation, you may be offered or be able to request a structured settlement. However, unless you’re already familiar with the legal and financial technicalities surrounding structured settlements and compensation payouts in general, it can be challenging to understand how they work.

Not understanding what a structured settlement is and how they work means you also have no idea whether accepting one is a good idea in your circumstances!

Here, we will explore everything you need to know about structured settlements and how they work and look at some specific situations where you might be offered or request one.

What is a Structured Settlement?

Although it might seem like an intimidating term, structured settlements are actually easy to understand.

Here two ways lawsuits may play out:

  • You win a civil lawsuit, and a judge or jury rules that a company or individual must compensate you with a specific amount of money. In this situation, you are likely to get a lump sum payment.
  • You agree to a settlement with the individual or company you are claiming against before the case reaches the courtroom.

You would then typically have the following options to receive the money:

  •  Receive the total amount as a lump sum.
  •  Receive a portion of the total amount as a lump sum, then the remainder as installments over an   agreed period.
  •  Receive the total amount as installments over an agreed period. This may or may not include a life  contingent payment phase to the installments. We will discuss what life contingent structured settlement payments are in a later section.

If you receive installment payments over an agreed period, that’s a structured settlement! Depending on the context of a specific case, you might see a structured settlement called a structured settlement payment agreement or referred to as periodic payments.

Whether you will get a lump sum of a structured settlement depends on several factors.

First, the amount of money you are offered  might influence how the you  want to get paid. For example, a you not want a structured settlement if the Defendant is paying you $25,000 but if the Defendant is going to pay you larger sums you may prefer to receive those amounts overtime.

The nature of the lawsuit may also influence whether a structured settlement is suitable. For example, if you bring a claim because you are no longer able to work and earn an income, a structured settlement may be a way to replace steady income.

Either party can offer or request a structured settlement. However, both parties must agree to the terms of the settlement before it becomes legally binding. This is to say that   structured settlements are generally agreed upon between the two parties involved in a lawsuit, rather than directly being awarded by a judge.

Typically, when a structured settlement is agreed upon, the defendant pays the money to purchase an annuity, which is then paid to you via an insurance company.

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How do Structured Settlements work?

We’ve already given you an outline of how structured settlements come into existence and why they may be preferable.  Now, we will take a closer look at the process in more detail.

While the sum of money you are to receive may be negotiated by yourself and the defendant, the process of setting up a structured settlement involves other parties.

As a minimum, expect the process of setting up your structured settlement to include:

Depending on how the negotiation of your structured settlement progresses, the process may also include:

  •  lawyers or independent financial advisors
  •  An economist

Here’s a look at the complete process, starting from the moment something happened that led you to bring a case against the defendant:

structured settlement progresses

  The event takes place that gives you grounds for a claim.

  A Solid Case Against The Defendant

You bring a case against the defendant on the relevant grounds depending on the event that occurred. You can bring civil suits to court for many reasons, including but not limited to personal injury, claims against your employer, medical malpractice, and wrongful imprisonment. You may also bring a claim for wrongful death should you believe the defendant to be responsible for the death of a loved one.

Winning the case or settling out of court

If you win the case or agree to settle out of court, you might agree to a structured settlement arrangement with the defendant.

  You agree to negotiate a structured settlement

Once you agree to negotiate a structured settlement, you will work to discuss the agreement’s specific terms. These discussions will include determining the size and the timing of the payments, their frequency, and how long they should continue. Each of these factors will be influenced by the total financial award agreed or ordered by the judge or jury. During these discussions, you will also ascertain whether one-off payments (lump sums) should supplement the regular payouts at certain times or whether the payouts should increase over time. This is where the financial advisors and economists might come into play. The structured settlement may even include a life contingent phase that will allow  you to receive income for as long as you are alive.  With the settlement agreed, the defendant provides cash to the qualified assignee.

The qualified assignee then buys an annuity from the money it receives from the Defendant.

The qualified assignee uses the cash to buy an annuity from a life insurance company. The qualified assignee will ensure the details of the annuity contract match the details of the structured settlement agreement.

The life insurance company makes payments directly to you, depending on the terms agreed in the annuity contract.  In most cases you will be identified as the “payee” under the structured settlement but you will not technically be the “owner”

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Selling your Structured Settlement

Selling your Structured Settlement

We will explore the advantages and potential disadvantages of structured settlements below.

We mention it here because one of the biggest questions people commonly ask about structured settlements is whether they can change the terms of their agreement at a later date.

The short answer to this is no; you can’t. However, that does not mean you do not have options should:

  • Your circumstances might change, and a structured settlement is no longer suitable, or you would prefer the liquidity of receiving a lump sum.
  • You decide that taking the structured settlement was a mistake and you now prefer to have received a lump sum.

If you’re in either of these situations, you might be able to sell your structured settlement, typically to a factoring company that buys structured settlement payments. There is a process involve in doing this and we will explore this process in later sections

You might be able to sell:

  • Some of your future payments. Generally, this means you get money today in a lump sum in exchange for the future payments but now you will no longer receive the settlement payments in the future.
  • A portion of future payments, meaning you receive a lump sum now, and then (instead of receiving the larger amount due under the structured settlement) you will receive smaller amounts for the remainder of the terms of settlement.
  • Your entire structured settlement. In this situation you sell your entire structured settlement, get a lump sum and no longer receive any payments under the structured settlement.

→ Which option is best for you is a decision you should make carefully and is very dependent on your life circumstances

→ It is also important to know the large the structured settlement you receive the more options you will have.

To sell a structured settlement, you must acquire court approval. Going through the court approval process may involve explaining your reasons for looking to sell your settlement and what you intend to do with the lump sum you will receive. This is true regardless where you live in the United States. In every state you must get court approval by a Judge that finds selling your payments is in your best interest.

One of the purposes of requiring court approval is to protect you. Part of the court approval process involves the judge checking  you understand what you are selling, how much you are getting paid and that moving forward will be in the best interests of you and your dependents.

If a judge thinks selling is not in your best interests, they may turn down your request. Common reasons for declining requests include if it appears the lack of regular payments will lead to financial hardship once you have spent the lump sum.

When selling your structured settlement you should treat as if you it’s a negotiation! While you might not think there is room to negotiate how much the buyer will pay you for your future guaranteed or life contingent payments, you are wrong and the factoring company/buyer is very likely able to offer more money than its initial offer.

To this end, a structured settlement buyer may increase its offer by a very large percentage once you start negotiating or if you bring an offer from another company structured settlement buyers. There is no generally rule when it comes to how much of a lump sum you will receive relative the aggregate of the payments you are selling. This is because factors such as the timing (when the payments are due), if the payments are guaranteed or life contingent and the amount of the payment, will impact how much a company could and will offer.   You can assume that the lump sum you will be offered will range from 10% – 85% of the aggregate of the remaining payments you are selling.   Often times it is better to look at the “effective rate” of the transaction when evaluating the offer you are receiving.  You should always consider alternative ways to raise the money you need before you agree to sell your structured settlement.

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What are the advantages of Structured Settlements?

Structured settlements have a considerable range of potential advantages. They are ideal for many people due to the guarantee of a regular income. If you are currently going through a civil case and are waiting to receive an offer from the defendant or be awarded a sum of money by a judge, you must consider both the benefits and the potential drawbacks of structured settlements.

100% Tax Free Payments

Payments are 100% tax-free, meaning you do not need to declare them to the IRS or any other authorities as income.

Outstanding Annuity Payments

If you die with annuity payments outstanding, your spouse or another beneficiary can continue to receive the payments, which remain tax-free.

Time Span of the Structured Settlement

Your structured settlement can span any length of time, subject to the agreement you negotiate with the defendant and what the qualified assignee and the life insurance company can offer. You may also be able to defer payments to a later date. This is a possibility you may wish to explore if you negotiate a settlement a few years before your retirement, for example.

Flexibility in receiving the Payments

Your structured settlement can be flexible and allow you to receive one-off, lump-sum payments at certain times. You may also be able to structure your settlement in a way that your payments gradually increase or decrease, depending on your needs.

Flexibility in Spreading out the Payments

Spreading out payments over a lengthy period removes the temptation to make a big purchase or splurge your cash on things you don’t need. It can also ensure you always have the money to hand if, for example, the event that led to your case has left you with a medical or health issue that will require long-term care and management.

Unaffected from Market Fluctuations

Spreading out payments over a lengthy period removes the temptation to make a big purchase or splurge your cash on things you don’t need. It can also ensure you always have the money to hand if, for example, the event that led to your case has left you with a medical or health issue that will require long-term care and management.

Increasing Size Of Your Structured Settlement Payments

You may be able to arrange that your structured settlement increases by a fixed percentage over time. In other words, some settlement annuities are set up to increase by anywhere from 1% to 4% each year. This increase could allow you to keep up with increasing cost of living each year. This is annual increase, often referred to as a COLI or COLA, must be put in place at the time the annuity is set up .

What are the potential downsides to Structured Settlements?

When considering a structured settlement, it is equally as important to consider the potential downsides as well as the potential benefits.

These potential downsides include:

The inability to change your structured settlement‘s terms after agreeing on the details and having it finalized in court. If a change in the economy or your circumstances leads to a change in your financial situation, you may only have the option to sell your structured settlement. 

If you face a financial emergency,you can’t quickly get funds if you have a structured settlement. If you want to sell your structured settlement, a judge will generally sign this off within 45 to 60 days of an application.  It could take over 4 months in some cases depending how quickly the docket moves in the Court where the buyer has to file the petition.   Therefore, it could take significantly longer to get the cash you need.

The court process framework prevents you from selling your structured settlement or taking a lump-sum paid without judicial approval.  Many people did not like having to justify why they need the money to a Judge when they feel they are competent to make their own decisions.

Types of cases for Structured Settlements

  1. Personal injury cases
  2. Workers Compensation
  3. Medical Malpractice
  4. Wrongful Death
  5. Workplace Discrimination or Harassment
  6. Sexual Abuse
  7. Wrongful Imprisonment

Structured Settlements in personal injury cases

Personal injury cases are among the most common type of civil claims that lead to structured settlements.

While not focusing specifically on structured settlements, Martindale-Nolo Research’s 2017 personal injury study highlights how much you can win in a personal injury settlement and the effectiveness of seeking legal counsel when doing so.

Some of the most startling statistics from the study include:

  •   71% of all personal injury claims end with a settlement.
  •   26% of all personal injury awards exceeded $25,001.
  •   91% of claimants received a payout if they had a lawyer, compared with 51% of people who didn’t use a lawyer.
  •   The average settlement for claimants with a lawyer is $77,600, a massive $60,000 more than the average payment for claimants who don’t use a lawyer!
  •   Claimants who negotiated their settlements were awarded an average of $42,500. Those who accepted the first settlement offer received an average of only $11,800.
  •   Claimants who threaten or file a lawsuit win an average of $45,500, compared with $23,000 for claimants who take no steps towards making a claim.
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Structured Settlements for workers compensation

According to Hollington Brown LLP, citing the National Safety Council, an American is injured at work every seven seconds. Admittedly, employers aren’t at fault for all these injuries, but they are in a substantial proportion of cases.

According to LaBovick Law Group, the success rate for workers compensation claims is a little higher than for personal injury claims, standing at 73%.

Workers compensation payouts are typically lower than personal injury payouts, at $21,800, with 68% of claims paying out between $2,000 and $40,000. One of the reasons for lower settlements for workers compensation claims is that it is possible to claim for even minor injuries, such as sprains and strains. At the same time, it is often also possible to receive a payout without proving fault on your employer’s part.

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Structured Settlements for medical malpractice

Reading the Expert Institute’s Medical Malpractice Payout Report for 2018, a couple of significant statistics jump out at you:

  •   96.5% of all medical malpractice cases are settled out of court.
  •   The average payout in medical malpractice settlements is $348,065.

The level of settlement you’re able to negotiate may depend on your location. For example, the average payout in New York state is $446,461, almost $100,000 higher than the national average.

Payouts for medical malpractice also differ depending on the type of claim made, with the following claims consistently the most common:

  •   Diagnosis errors (34.1% of all medical malpractice claims)
  •   Surgical malpractice (21.4%)
  •   Treatment errors (21.1%)

Generally, payouts are linked to the severity of the injury. While most medical malpractice claims are due to a person’s death, such claims only payout an average of $386,317. In contrast, the average payout made to individuals left with a brain injury resulting from medical malpractice is $961,185.

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Structured Settlements for wrongful death

While settlements for premature death resulting from medical malpractice average $386,317, wrongful death settlements, in general, can average around $500,000.

According to Florida-based injury attorneys Jack Bernstein, wrongful death settlements can often exceed $1 million and often be far higher.

Why such colossal fluctuations? More so than any other type of settlement, a payout for wrongful death will be heavily based on the circumstances of the deceased’s family and surviving dependents as much as the circumstances surrounding the death itself.

Claims against wrongful death and the settlement itself will consider factors including:

  • Financial support the deceased would have provided to their family.
  • Other services and support the deceased would have provided to their family.
  • The age and general health of the deceased.
  • The needs of surviving dependents, such as funding for college tuition.
  • The extent to which a third party is at fault in the case, including considerations as to whether active neglect, or other aggravating factors, are at play.
  • Whether exemplary damages are also payable depending on the specifics of the case.
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Structured Settlements for workplace discrimination or harassment

Given the vast range of variables at play in workplace discrimination or sexual harassment cases, there is little reliable data on average payouts. For example, a settlement for sexual harassment may depend on the extent and nature of the harassment. Likewise, a claim against your employer under the Americans with Disabilities Act will generally work differently from a claim under the Age Discrimination in Employment Act.

It’s also vital to consider that, for obvious reasons, many sexual harassment cases within workplaces are settled in-house, with the details never becoming public.

In general, payouts are capped based on the size of the business. This is hugely inequitable; what makes a harassment or discrimination case less valuable just because a company has 90 employees rather than 105?

If you’re considering a claim for workplace discrimination or sexual harassment, you should consult with an attorney. They will assess your case in the context of your state laws if your claim needs to go down such a path.

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Structured Settlements for sexual abuse

Cases of sexual abuse are some of the most emotive that we read about, particularly in the case of historical abuse linked to educational and sporting institutions and the church.

The Dordulian Law Group Blog contains a detailed summary of the top 10 settlements for sexual assault, abuse, and harassment in the United States. This summary includes educational and sporting institutions, the church, and media and news industry cases.

As you will see, the settlements differ significantly, from a few hundred thousand dollars per victim to multi-million dollar settlements in serious and high-profile.

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Structured Settlements for wrongful imprisonment

Being a victim of wrongful imprisonment can be hugely traumatic. Not only do you potentially lose years of your life if wrongfully imprisoned, but you could also lose your family, friends, and your home. After such an experience, even leaving prison can be hugely stressful, as you find yourself starting your life from scratch. Even if you are eventually cleared of wrongdoing, you may still find it challenging to transition back to a “normal” life. As such, you could experience significant mental health problems and associated issues for years to come.

Settlements for wrongful imprisonment can reach many millions of dollars depending on the circumstances. A structured settlement can help return some normality to individuals who have been wrongfully imprisoned by providing a regular income and potentially a lump sum with which to buy a property and a vehicle.

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Common Structured Settlement payout options

Regardless of the circumstances that have led to you being awarded a sum of money and now subsequently negotiating a structured settlement, there are several common structured settlement payout options.

If you are ever faced with needing to negotiate a structured settlement – or you’re awarded a sum of money and request a structured settlement – it is worth being aware of your options. Of course, what you can achieve may depend on how flexible the defendant is willing to be and what you’re able to negotiate.

Person A’s structured settlement may look wildly different from person B’s structured settlement.

For example, you will be able to negotiate the following with your specific preferences and circumstances in mind:

The payment schedule – be this monthly, annually, or at another frequency.

  • The start date of your structured payments, any immediate payments or lump-sums to be paid during the settlement, or the extent to which you wish to defer some payments
  • The end date of your structured payments
  • Death benefits to be paid to your spouse or other beneficiaries

Remember, if you are still due payments when you die, these can continue and be paid to someone else. However, you may wish to add specific elements that payout on your death to your structured settlement, too.

What are your payout options?

The below four options are commonly found within structured settlements. Remember to take financial advice and choose the best option for you. You should ensure you clearly explain the option you wish to explore when negotiating your settlement with the other party.

Lifetime Payments

Lifetime Payments are when payments are distributed regularly until you die. When you die, payments stop, and typically nothing will be transferred to a spouse or beneficiary. However, you might build in death benefits to such a settlement.

Period Certain Arrangements

Period Certain arrangements are when you agree to receive payments over a specific period, typically a predetermined number of years. Once the term is over, the payments end. However, if you die with outstanding payments remaining, the insurance company will normally pay these to your spouse or another beneficiary. Depending on your age, a Period Certain arrangement might be a risk if it will be the only income you will receive for the rest of your life.

Life with Period Certain Arrangements

Life with Period Certain arrangements can be highly attractive as they combine elements of Period Certain and Lifetime Payments arrangements. If you have this arrangement, your payments are guaranteed for the agreed period. If you die during this time, your spouse or another beneficiary receives the remainder of the payments. If you live beyond the agreed period, the insurance company continues to pay you until death. However, in this scenario, payments wouldn’t continue after you die.

Joint and Survivor Arrangements

Joint and Survivor arrangements are popular with married couples. This is because, if you die, payments will continue to go to your spouse until they also die. However, payments end upon the second partner’s death, so there will be no further funds that are payable to your children, for example.

Understanding structured settlements and getting cash for your structured settlement

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