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Structured Settlements: Pro's and Cons

A structured settlement is an arrangement that provides the plaintiff with regular payments over the course of several years, or for the rest of the plaintiff's life. They are especially helpful in catastrophic-injury cases. Typically, the defendant's liability insurer funds an annuity policy for the plaintiff. The annuity produces a continuous stream of income over the term of the annuity. Annuity contracts can become quite complex, and may cover a variety of expected expenses.

PROS

  • A structured settlement may provide the plaintiff with a substantial tax benefit. Funds received from an annuity are tax-free as long as the plaintiff does not control the funds.
  • Plaintiffs receiving lump-sum settlements often spend everything within five years. Afterwards, many become dependent on the government for their support. With a structured settlement, the funds are preserved throughout the time of plaintiff's disability.
  • Annuity funds are managed by a professional. Some plaintiffs treat a lump-sum settlement like a windfall, and, well, gone is gone.
  • Annuities can be tailored to cover the plaintiff's specific needs and all sorts of future demands or contingencies.
  • Annuities are, in most states, protected by state insurance laws that guarantee that obligations of a bankrupt insurer are covered.
  • An annuity can be combined with a lump-sum payment to meet immediate expenses, such as medical bills, repayment of debts, rehabilitation costs, and the like.
  • A structured settlement can dedicate funds to cover unanticipated advances in medicine, so that if medical science develops a miracle cure, the plaintiff could give it a try.
  • A structured settlement may allow parties who are far apart in their settlement negotiations to close the chasm and make a good settlement possible.

CONS

  • If the plaintiff retains too much control over the proceeds, the IRS may look at the situation and decide that the tax benefit must be forfeited.
  • The plaintiff may fear that, no matter how the settlement protects against adverse economic conditions such as inflation or recession, unknown changes in the economy could make the annuity payments too small.
  • Sometimes, the annuity is placed with brokers who do not have sufficient protection for insolvency.
  • Insurance companies are reluctant to disclose how much they will have to pay to buy an annuity covering the amount of the settlement. A structured settlement frequently costs the insurer much less than it would to make a lump-sum settlement. The problem with this is that the plaintiff's attorney may not be able to make a complete assessment of the merits of the settlement offer.
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