Understanding a Structured Settlement

In basic terms, a structured settlement is a financial or insurance arrangement in which periodic payments are made to the recipient to resolve a personal injury tort claim. It is an alternative to a lump sum payment, which makes it a popular choice for the plaintiffs and the defendants. The actual payment schedule will be set up by both parties involved, and can be tailored to meet the recipient’s specific needs.

Structured settlements can be paid in equal installments, smaller lump sums, or through installments of varying amounts – whatever proves to be the best for the parties involved. When the agreement is first set up, the recipient can also take the opportunity to consider their personal situation and make sure the settlement will cover their monthly expenses, hazards on the job, current age, and future savings and investments. There are a lot of benefits to structured settlements for both parties. However, there are also some drawbacks that should be noted.

Structured Settlement Benefits

A structured settlement represents an opportunity to receive an ongoing income. If the payments are due to a disabling injury that prevents the recipient from working, this can be extremely useful. It is also particularly good for people that need help controlling their spending, and it helps them spend their payments more effectively.

Other benefits include a reduced tax obligation compared to what a lump sum payment would incur, and a reduction in lawyer and court fees. This is one reason why the insurance companies really prefer structured settlements. If they can settle the amount outside of court the costs of the lawyers will be much lower, and they won’t have to risk an arbitrarily high amount awarded by a judge.

Structured Settlement Drawbacks

While structured settlements are extremely convenient most of the time, there are still a few drawbacks that potential recipients should be aware of. First, many people receiving a structured settlement can start to feel trapped in their payment schedule and can’t deviate from it in any way. This isn’t too important until circumstances change and the recipient needs more money that the monthly payment will allow.

In other words, most structured settlements can make it difficult to do things like put a down payment on a home or a car. Or, if there are sudden medical problems, the standard, monthly payment may not be enough to cover it. In cases like these, selling the settlement for a lump sum may be more helpful – but only if you can manage your funds wisely.

 Consider Your Options

Deciding what option you will take in these circumstances will have a large impact on your financial future. Take the time to discuss the issue with a consultant and find out if a structured settlement or a lump sum is right for you.

Inflation is an increase in the level of consumer prices or a decline in the purchasing power of money caused by an increase in available currency and credit beyond the proportion of available goods and services.

The long-term dollar amount you are awarded through a structured settlement can be worth much less by the time the payouts are received. As time progresses, inflation causes a steady increase in the cost of living; however your structured settlement payments may remain fixed or may not increase by the rate of inflation. This uneven relationship ultimately may result in the value of your settlement steadily decreasing with each passing year.

With steadily increasing inflation, the cost associated with things naturally increases. For example, in 1980, a new car cost less than $15,000 and gas was less than 75 cents a gallon. Today, a new car costs twice that amount and gas has increased by over 300%. Less than 20 years ago, the average house sold for less than $70,000 but it costs well over twice that much now. So money received today is worth less than it was in the past because everything costs more today. This means your settlement payments received in the future will be worth much less than the same money received today.

The chart shows the declining value of annual payments of $32,000 as they are paid over time. In this example, the $32,000 is worth half as much when paid in ten years from now, just from the impact of inflation.

The rate of inflation is calculated based on a statistic called the Consumer Price Index (CPI), which is compiled yearly by the Bureau of Labor Statistics. The inflation "rate" reflects the percentage change in the CPI from the previous year. The CPI is based on the prices of food, clothing, shelter, fuel, transportation fares, doctors' and dentists' fees, drugs, and others goods and services that people require for day-to-day living. Prices are collected from 87 urban areas across the country, encompassing about 50,000 housing units and approximately 23,000 retail establishments such as department stores, supermarkets, hospitals, and filling stations. All taxes directly associated with these items are also included in the CPI.

How this specifically affects you is something that a Client First Consultant can review with you in detail when we discuss a Fast Forward of your settlement. Call us today at 888-594-1195.