Before the tax implications of structured settlements were included in the federal tax code, this type of settlement was considered risky for the claimant and the defendant. Today, structured settlements are a $5 billion industry.
Have you seen the ads for structured settlements? Unless you have experience with a lawsuit, you may not be familiar with what they are.
What is a structured settlement? Keep reading to learn everything you need to know about how they work.
What is a Structured Settlement?
When someone is involved in a civil lawsuit, it may be resolved with a structured settlement. The person who wins the case is awarded a settlement that comes through a stream of payments over a period of time.
The money is funded through an annuity handled by an insurance company. This annuity guarantees regular, scheduled payments.
How Does a Structured Settlement Work?
When a person is responsible for an accident, injury, or death of another person, a lawsuit may follow to get a plaintiff to pay compensation. To avoid going to court, the defendant might agree to pay the plaintiff through a structured settlement.
If the case goes to court and the judge rules for the plaintiff, a structured settlement may also be ordered and will use an assignee to pay the money to the plaintiff.
What is an Assignee?
An assignee is a qualified person to whom the defendant gives the money to buy the annuity for the plaintiff. The assignee works to set up the terms of the structured settlements.
Terms of the agreement include how much the regular payments will be, the period of time over which the payments will continue, should payments increase or include larger payments some of the time, etc.
The Next Steps
The assignee, armed with the agreed-upon terms, buys the annuity from a life insurance company.
The life insurance company is then responsible for paying the plaintiff according to the predetermined terms of the settlement. There’s no changing the terms of the agreement.
The only way for the plaintiff to get money quicker or ahead of the scheduled payments is to choose a cash advance structured settlement by selling it in the secondary market. This negates the right to any future payments.
When you receive money from a personal injury case, it is almost always tax-free. It does not count as income even when accruing interest.
Once you have the money, you are responsible for any taxes and dividends on the lump sum.
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Best Structured Settlement
Now you know the answer to the question, “What is a structured settlement?” If you have an upcoming civil lawsuit, you’ll be better informed on how structured settlements work.
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