Structured Settlements: Pros and Cons

Not every lawsuit will make it to trial. Many civil cases, particularly those dealing with accident and personal injury lawsuits, are resolved due to the parties reaching a settlement agreement earlier in the litigation process. Generally, a negotiated settlement requires the plaintiff (the person that has filed the lawsuit) to discontinue any further legal action in exchange for receiving a payment from the defendant or the defendant's insurance company. Settlement payments are usually made as a lump sum (all at once) or on a structured schedule (regular payments over a period of time).

A structured settlement is an arrangement that provides the plaintiff with regular payments over the course of several years or, if applicable, for the rest of the plaintiff's life. They are especially helpful when the plaintiff suffers a serious and permanent injury, known as a catastrophic injury. With a structured settlement, a defendant's insurer typically funds an annuity policy for the plaintiff. An annuity produces a continuous stream of income over the term of the structured settlement. Annuity contracts can be very complicated, and they typically cover a variety of expected expenses.

Before accepting any settlement agreement, you should always discuss all available options with a tax attorney, personal injury attorney, or certified public accountant (CPA). They can help you fully explore the tax consequences of a verdict or settlement. Below are some pros and cons of structured settlements for you to consider.

Pros of a Structured Settlement

• A structured settlement may provide a plaintiff with a substantial tax benefit because personal injury settlements are considered "tax-free" under the U.S. Tax Code. However, some exceptions apply and can make portions of a settlement taxable, such as an award of punitive damages or interest that accrues on the settlement. Speak to a qualified attorney or tax specialist to learn more.
• Structured settlements offer plaintiffs the certainty of payments over a fixed period of time. However, lump sum payments may be better suited for cases involving minors because they allow for long-term investing. They may also be better suited for cases involving those suffering from a debilitating injury that will require long-term medical expenses.
• Parties may tailor annuities to cover a plaintiff's specific needs and all sorts of future demands or contingencies.
• In most states, annuities are protected by state insurance laws which guarantee that the obligations of an insurer will be covered. Although federal law doesn't allow an insurer to formally declare bankruptcy, most states have a safety net for insurance companies that become insolvent. Insurance companies and policy claims will continue to be covered and paid by the home state's guaranty association, subject to state limits. Learn more about the key provisions in your state if you aren't sure about the specifics.
• A lump-sum payment may be combined with a structured settlement to meet immediate expenses such as medical bills, repayment of debts, and rehabilitation costs, to name a few.
• Parties can dedicate funds of a structured settlement to cover unanticipated advances in medicine so that if medical science develops a miracle cure, the plaintiff can give it a try.
• A structured settlement may help parties who are far apart in their settlement negotiations to reach an agreement acceptable to both the plaintiff and the defendant.

Cons of a Structured Settlement

• Certain parts of a settlement, regardless of whether they are lump sum or structured, can be taxed—including but not limited to punitive damages, some attorney's fees, and purely emotional damages not stemming from physical injury. It's important to speak to a qualified attorney regarding which parts of a settlement can be taxed.
• A plaintiff may fear that, no matter how the settlement protects against negative economic conditions such as inflation or recession, unknown changes in the economy could make the annuity payments too small.
• In the past, some insurance companies were reluctant to disclose how much they would have to pay to buy an annuity covering the amount of the settlement. A structured settlement frequently costs insurance companies less than it would to make a lump-sum settlement. Without this information, the plaintiff's attorney will not be able to make a complete assessment of the benefits and drawbacks of a settlement offer. Some states, such as New York and Florida, have some form of a disclosure law known as a "Structured Settlement Protection Act" (SSPA). These laws require insurers to be upfront about their costs.

Learn More About Structured Settlements by Talking to a Lawyer

In many circumstances a settlement may prove to be a faster, cheaper, and less stressful alternative to trial. Contact an experienced personal injury attorney to discuss the facts of your case and help you decide whether a structured settlement would be in your best interest.