In this guide, you’ll find an in-depth overview of what structured settlements are, the advantages and disadvantages they represent, and some important questions you should ask when making this important decision.
What Is a Structured Settlement?
At its most basic, a structured settlement is “a financial or insurance arrangement whereby a claimant agrees to resolve a personal injury tort claim by receiving periodic payments on an agreed schedule rather than as a lump sum.”
In other words, if you’ve been awarded money (e.g. a settlement) as part of a lawsuit, the terms of the agreement stipulate that you’ll receive your money in regular payments or installments, instead of all at once.
Here’s a quick (and admittedly simplistic) example:
Let’s say you sustained long-term injuries from the use of a pharmaceutical prescribed by your doctor, and after going to court, you were awarded $1 million for your pain and suffering, as well as for your future medical costs.
However, instead of being paid all at once, you agree to a structured settlement, where you’ll receive monthly checks amounting to $4,166 over the course of the next 20 years.
Structured settlements can technically be used for any kind of case, although they’re most common for individuals with temporary or permanent disabilities, for minors or individuals found to be incompetent, for worker’s compensation cases, as well as wrongful death and severe injury cases.
Structured Settlement Payments
In order to fund a structured settlement, the responsible party will purchase an annuity, into which the full amount is deposited (in this example, $1 million), and which is then dispersed to you over a predetermined period of time.
In some instances, the structured settlement may be set up directly by the responsible party, or (as in the case of a minor, or an individual who may not be capable of handling their own finances) by a third party.
Regardless of whether or not a third party is utilized, structured settlement payments can be made in a variety of formats, including:
Yearly – As in the example above, your total settlement amount is divided into equal payments, which you’ll receive on a regular basis until the settlement amount has been honored.
Inflation Hedging – When your structured settlement payments are dependent on inflation or deflation and can fluctuate accordingly.
Monthly Indexed Installments – Attaches your structured settlement to a financial index, which means that your payments can fluctuate depending on the performance of the chosen index.
Differed Payments – Unequal payments that are intended to cover specific expenses.
Future Care Payments – Payments intended to cover medical or housing expenses than can fluctuate over time.
Granted, structured settlement payments can be set up in almost an endless number of ways, although the above are some of the more common examples.
What Are Some of the Benefits of Structured Settlements?
Obviously, the biggest advantage related to structured settlements is that they can provide compensation to an individual for injuries they sustained, and to provide a source of income for their short or long-term living and medical expenses related to the injury.
On top of this, structured settlements often represent a “middle ground” between the plaintiff and defendant, which can close a case that might otherwise take years to wriggle its way through the courts, providing you with less stress and greater peace of mind.
Also, the trickle-down payments from structured settlements can help individuals better manage their finances, as most who receive lump sum settlements will have spent it within just a few short years.
In addition, any payments you receive through a structured settlement are free from federal and state income taxes, versus lump-sum payments (which we’ll talk more about in a moment) that are taxed as income.
And because structured settlements are held in annuities, they can be tailored to meet your needs, and the professionals who manage them can assist with proper financial planning.
What Are Some of the Disadvantages of Structured Settlements?
While the professionals who handle your annuity might be able to provide you with financial planning advice, their services will usually cost money, which means you could watch a portion of your payments be taken out as fees.
But perhaps the biggest stumbling block associated with structured settlements is their rigidity. For example: If you can’t work as a result of your injuries, the money withdrawn from your settlement represents your only income source.
So what happens when an emergency arises (e.g. house or car repair, unexpected medical bills, etc.), and you don’t have enough money in the bank to cover it?
Unless your annuity is set up to allow infrequent withdrawals that can assist with these types of emergencies, you could just continue digging yourself into a financial hole and end up with an increasing amount of debt.
And it’s this gray area that structured settlement companies claim to help individuals address, which is what we’ll talk about next.
When Times Get Tough: Selling Your Structured Settlement
Whether it’s needed for an emergency or something else altogether (e.g. to purchase a home, pay for college tuition), you might feel that the money from your structured settlement is yours to rightly decide what to spend it on.
However, structured settlements come with very strict conditions, so accomplishing this isn’t as simple as contacting your financial planner and withdrawing money.
Enter structured settlement buyers. These companies specialize in providing lump-sum payments (known as “cash outs”) for settlements that would otherwise be spread out over the course of several years or decades.
In other words, companies like these work to “un-structure” your structured settlement, and if your case is still pending, can even provide you with advance funds based on your anticipated settlement.
Structured settlement companies are fairly flexible in the services they provide, which means that you can often decide how much of your settlement you’d like to cash out (e.g. you don’t have to exhaust your entire settlement in one fell swoop).
What Are Consumers Saying About Structured Settlement Companies?
Among these companies, common compliments citing ease of doing business, and that they really came through when there were no other options.
On the other hand, some of the most common complaints appeared to reference very high interest rates (in some instances paying back double the original loan amount), poor customer service, and a fair amount of runaround throughout the process resulting in months-long delays.
Should You Sell Your Structured Settlement?
As noted by consumers in the previous section, the defining advantage provided by structured settlement buyers is that they provide individuals with immediate access to their money. However, the biggest disadvantage is that these services often come at a steep cost.
For example, out of the structured settlement companies noted above, some charge fees in excess of 20%. This means that if your structured settlement is $100K, you could lose $20K or more in direct fees (in addition to any insurance fees), which is a big chunk of change by any measure.
On top of this, there may be additional fees (such as high interest rates if you’re provided a loan through a pre-settlement agreement), which can be especially damaging if your settlement ends up being less than originally anticipated. However, the fees you’ll pay depend heavily on your specific circumstances, so they could be more or less than what’s cited above.
Also, keep in mind that because you’ll be undoing your previous legal agreement, you (or the company representing you) will have to go to court to have your settlement turned over to them, at which point they’ll provide you with your lump sum payment, less any fees.
In many instances, this process can go smoothly, but it’s entirely feasible that you may have to pay additional legal costs associated with your case if your proceedings become ensnared in legal bureaucracy.
In fact, depending on the state in which your structured settlement is held, you may need to jump through additional hoops to cash out—or, the option may not be available at all.
Finally, most financial professionals recommend hiring a lawyer when you begin the cash out process.
While structured settlement companies will certainly have a team of lawyers working to move your case through the system as quickly as possible, they may only have the company’s best interests in mind.
As such, you’ll want to make sure you have solid legal representation that has your best interests in mind, although this will certainly come as an added expense.
In short, whether or not you should cash out your structured settlement is completely dependent on your unique circumstances, although some good questions to ask include (be honest with yourself!):
Do I really need the money?
If I cash out, will my future be negatively impacted? In other words, do I have enough money to continue paying for my mortgage, medical expenses, etc.?
If receiving a large sum of money, do I have the financial maturity not to spend it all at once, or should I hire the services of a financial professional for guidance?
Are the fees charged by the settlement company in line with their services? In other words, will I be getting solid value for what I’m spending?
What are other consumers saying about companies I’m considering?