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STRUCTURED SETTLEMENTS

"You had a Structured Settlement, but you need cash now!" , bellows the TV commercial.  What are structured settlements and should you get your cash now?   What hacks me off is there is so much deception (spin) in the media.  Before you are tempted to "surrender" your structured settlement, become educated on the subject and  read what follows below.  And if you are an accident victim considering a settlement beyond $100,000 you should be exploring a structured settlement.  Unfortunately, there are very few educated lawyers out there on the subject of Structured Settlements. 

Structured settlements were first conceived in the early 1960's with the 'thalidomide babies'.  Thalidomide was a sedative that was found to be responsible for severe birth deformities when taken during pregnancy.  As lawyers analyzed the claims against the drug companies that peddled these products, they had to determine how these severe birth defects in young children would affect them over their entire lives.  The need for a substantial flow of money for their care was immediately apparent.  Throwing a bunch of money at the parents of the disfigured babies to settle these claims was hardly the solution.  Innovative settlements included setting up stock funds or other investment devices to fund a flow of money to these children in a way that would protect them for their life span.  There was virtually no way these children would recover from these severe birth defects, so healing and consequent diminution of their disabilities over time was not an issue. 

Eventually, the insurance industry determined that funding such settlements over time for accident victims who were severely injured made sense for both sides.  Here is why.  Studies showed that 95% of accident victims had spent all of their cash settlements within five years regardless of the severity of their injuries and the size of their settlements.  Every accident victim wants a new car.......!   This means that often, accident victims with lifetime disabilities became destitute after wasting their lump-sum settlements.  In one recent case, the local trustee of a tragically injured immigrant in an auto accident case received a large settlement left in the hands of the trustee.  The accident victim became destitute overnight.  The trustee withdrew the funds and left for their mutual homeland never to be heard from again.  Structured settlements can avoid such a thing as we shall see.

Structured settlements further help an accident victim because of a particular tax advantage.  Personal injury settlements are not taxable.  Investment income from the funds received in a personal injury settlement and subsequently invested is taxable.  However, due to a specific IRS letter ruling, investment income from the funds received in a Structured Settlement is not taxable albeit that percentage return on investment income from a Structured Settlement may be a bit lower than one could get through their own investment portfolio. 


Now, what is in it for the insurance company to do a structured settlement? Plenty.  Most Structured Settlements are now funded by the insurance companies in the form of an annuity purchased by them in their life companies.  This gets a bit technical, but if you stay with me, you will learn something new of value.  Life insurance is a poor investment.  With life insurance, the consumer pays money in monthly or other regular increments in order that their heirs will receive a pile of money in the future after the consumer dies.  The percentage return on an investment in life insurance is often only 1 or 2 percent.  An annuity is the opposite.  An annuity is funded by a large pot of money now (usually the settlement proceeds --- less $20,000 for the new car) and payments are made in regular increments to the victim for the accident victim's life or for a defined period like ten or twenty years in case of a premature death of the victim.    The percentage return on an annuity is usually better than on a whole life insurance policy. 

There is a further huge benefit to the insurance company.  They get to use the accident victim's money (often earning as much as 40% investment income by retaining the funds in their coffers rather than the lump-sum expended in a regular settlement).

IN SUMMARY:     In summary, both the accident victim and the insurance companies benefit from structured settlements.  The accident victim benefits by not having to pay tax on their structured settlement investment income.  The accident victim further benefits by having the money out of reach of the unsavory parent or trustee because the funds are paid out in increments.   Moreover, the victim is not likely to waste the money in less than five years as happens so often with lump-sum settlements.  Further, the funds are safe from the reach of creditors unlike lump-sum settlements because the settling insurance company is the owner of the annuity that is paid to the victim-beneficiary of the annuity.  (See, I told you it is a bit complicated!)  The insurance company benefits by investing the money for their own profit that would otherwise be 'out-the-door' in a regular settlement. 

So, don't buy the T.V. charlatan's clarion call to cash in your structured settlement for the following reason.  There are substantial structured settlement surrender charges that they don't tell you about in the T.V. ads.  Structured Settlements are good for the accident victim and the insurance system and deserve to be examined by anyone severely or even substantially injured in an insurance settlement scenario.  Truth is better than spin.  Spin is lying. 


Posted on Thursday, August 7, 2008 at 09:23AM by Registered CommenterLAUREN PAULSON in | Comments1 Comment | References23 References

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Reader Comments (1)

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