FAQs | NFP Structured Settlements

Frequently Asked Questions

What is a structured settlement?

A structured settlement is a proven, effective solution to meet the future financial needs of personal injury claimants. Since the early 1980s, structured settlements have been widely used to compensate severely injured, often profoundly disabled, injury victims as part of a voluntary settlement to include future periodic payments. These payments come from well-capitalized, financially experienced institutions, such as highly rated life insurance companies, and are tailored to meet the injured person’s future medical expenses and basic living needs. These payments may be scheduled for any length of time — even as long as the claimant’s lifetime — and are structured to meet the financial needs of the claimant.

A structured settlement arrangement may be agreed to privately, as in a pre-trial settlement, or it may be required by a court order, as in a settlement or judgment involving a minor. Claims professionals, plaintiff attorneys, judges, and defense attorneys advocate the use of structured settlements because they can effectively meet a claimant’s needs for security, and provide greater benefits over time.

Why structure a settlement?

Historically, damages paid because of a personal injury lawsuit came in the form of a cash lump sum at the time of settlement or judgment. This kind of payment, especially in catastrophic injury cases, places the claimant (or the family) in the position of managing a large sum of money, which is intended to provide for a lifetime of medical and other needs.

Since most people are inexperienced in handling large sums, there is the danger that the money will be spent quickly or invested unwisely, leaving little or nothing to cover the future needs of a seriously injured person. Indeed, evidence suggests that many claimants who receive lump sum awards dissipate their assets and are left with unmet needs within a relatively short period of time.

Thus, structured settlements were developed to create a more stable financial basis for the claimant.

How does it work?

The defendant agrees with the injured person on a stream of periodic damage payments tailored to their particular future needs like, medical care, basic living, and family needs. The defendant then assigns its obligation to make the future payments to a life insurance company, which funds the claimant’s payments with an annuity.

Annuity contracts have been the preferred way of funding because of their pricing and flexibility for settlement design. An alternative is a trust fund, which invests only in United States Treasury obligations. These trusts add the safety of investment in obligations issued by the U.S. Government

When should someone consider a structured settlement?

Structured settlements can be ideally suited for cases involving the following situations:

Temporarily or permanently disabled plaintiffs or claimants.
Guardianship cases, including minors or incompetents.
Wrongful death cases where the surviving spouse and/or children need monthly or annual income.
Severe injury, especially with long-term needs for medical care, living expenses and support of family.
Workers’ compensation claims where issues of future income or medicals needs must be met and a Medicare Set-Aside has been suggested.

What are the benefits of a structured settlement?

The claimant receives compensation when it is needed. Instead of receiving a cash lump sum that has to be invested at risk and managed for a fee, the recovery is paid out over time. Structuring a settlement helps time payments with the actual need for funds.
The full amount of the damage payments for a personal, physical injury case is tax-free. By structuring the settlement proceeds, the claimant can receive future periodic payments also completely tax-free.
The claimant receives payment from two of the safest types of funding assets available: life insurance annuities or U.S. Treasuries.

What are the advantages to the defendant/insurer?

Structured settlements benefit defendants and insurers through:

Faster claims resolution with more creative settlements, including assistance by structured settlement consultants with negotiations, life care planning, and settlement documents.
Reduced litigation costs.
Avoidance of the risk and expense of a jury trial.
The ability to assign future liability through a qualified assignment.

Defense Attorneys

Why should plaintiffs consider structured settlements?

There are many benefits to claimants/plaintiffs, including:

Structured settlements in physical injury cases provide a guaranteed payment stream that is fully tax-free. (Check with your tax advisor for details and confirmation.)
Claimants/plaintiffs avoid the risk of mismanagement. Insurance industry statistics show that about 25 to 30% of claimants who accept all-cash settlements completely dissipate their judgments or settlements within two months of recovery, and 90% of them spend it all within five years. (Source: The Rutter Group, Ltd. from Flahavan, Rea, Kelly & Tener, “California Practice Guide: Personal Injury” (TRG 1992) Ch. 4.)
Recipients avoid unnecessary financial strain. Structured settlements provide a secure, low-risk source of compensation and the convenience of regular payments tailored to the plaintiff’s specific needs.
The claimant can receive more compensation over time than through a lump-sum settlement.
Structures can offer rates of return that are competitive with other financial vehicles.
Structures provide an efficient means of resolving claims and avoiding the expense and delay of a trial.
Under a structure, a claimant can avoid the risk of outliving his or her recovery by transferring the risk to a secure financial institution with experience in this field.

Are you able to use a structured settlement in workers’ compensation claims?

Yes. An injured worker can tailor a structured settlement to fit his or her needs whether it be to supplement income, fulfill long-term medical needs, assist with family needs or to reduce the out-of-pocket costs for Medicare Set-Aside accounts.

Are there other uses for periodic payments?

Although the concept of periodic payments has traditionally been applied to personal injury claims, there are other situations where payout obligations can be made on a periodic basis.

Employment

Wrongful Termination

Sexual Harassment

Discrimination

Mental Anguish

Contract Disputes
Divorce settlements
Construction Defect
Punitive Damages
Property Loss Claims
Environmental Claims and Pollution Liability
Qualified cases in which the funds have already been paid to the claimant or his/her attorney (constructive receipt)

What is a secured creditor?

Under a structured settlement where the defendant retains the periodic payment liability, the federal tax code allows the claimant to have no more than a general creditor’s interest in the assets of the defendant, to the extent of the future payments. If the liability to make the payments is assigned to a third party, however, the tax code permits the claimant to have a greater interest — that of a “secured creditor.”

This interest is secured by the annuity or U.S. government obligation purchased by the assignment company to fund its future obligations to the claimant. Should the assignment company fail to pay, the claimant, as a secured creditor, can become the owner of the assets funding his/her payments. This ensures that the assignee’s other creditors cannot use the assets to satisfy their claims against the company. Note that this secured interest applies to the assignment company, not to the life insurance company issuing the annuity contract.