To date, forty-‐nine (49) states have passed laws regulating the transfer of structured settlement payments (SSPAs) that mandate that courts have hearings to determine whether the sale is in the “best interest” of a claimant and his or her dependents. If a judge determines that the transaction is in the “best interest” of a claimant and its dependents and that the sale complies with the requirements in the SSPA, the sale will be approved and the factoring company will purchase the payments from the claimant in return for a lump sum of cash. Included in whether a sale is in the best interest of a claimant and any dependents, a major factor is the “cost” of the transaction. This necessarily includes whether the “discount rate” (discussed later in this article) charged and the resulting purchase price is “fair and reasonable”.
Among other requirements in the SSPAs a factoring company generally must provide to a claimant:
•A separate written Disclosure Statement in advance of the funding date showing:
oAn itemized list of how the factoring company has calculated the present value of payments and gross amounts payable to the claimant in exchange for the payments;
and
oThe net amount payable to the claimant after deducting all itemized commissions, fees, costs, expenses and other items that may be charged by the factoring company.
Judges must analyze these Disclosure Statements, among other evidence, and understand the “cost” of a transaction including how the discount rate is calculated and why a claimant is sometimes receiving a certain amount of money in return for a disproportionately larger amount of money. Judges must then determine whether the discount rate is fair and reasonable and in a claimant’s and its dependents’ “best interest”.
In general, there are two (2) types of annuities used instructured settlements: (a) payments that are guaranteed to be made over a certain period of time; and (b) life-‐contingent annuities in which payments are made only until a claimant dies. These annuities are also referred to as non-‐guaranteed annuities. The purpose of these annuities is to provide a claimant with an income for a set number of years, sometimes as many ae 30 years into the future. A disadvantage of a life-‐contingent annuity is that a claimant receives the payments for only so long as a he or she is alive. For example, a claimant currently receiving structured settlement payments that are life-‐contingent will receive the payments when they are due but if they were to pass away, their heirs/family members will not be entitled to any payments that may be due on the annuity and, for purposes of this discussion, neither will a factoring company that purchases those payments. The receipt of guaranteed payments, life-‐contingent payments or a combination of both is determined at the timethe structured settlement is put into place. At this time, an analysis of a claimant’s current need of payments, his or her ageand other relevant factors is made to determine the nature and length of these payments. More times than not, if life-‐contingent payments are part of a settlement, those payments are typically scheduled to be paid relatively far into the future.
Most factoring companies purchase from claimants both guaranteed and life-‐contingent payments and the purchase of the latter has increased over the last couple of years. This article will focus on aspects of life-‐contingent structured settlement annuities because they are more difficult than guaranteed payments to underwrite given mortality and other factors.
A structured settlementis an agreement between a personal injury plaintiff (claimant) and a defendant liability insurance company in which the claimant agrees to settle a lawsuit in exchange for payments to be made over time by the liability insurance company. The liability insurance carrier then buys an annuity policy from a highly rated insurance company to make those payments on behalf of that liability insurance company. The payments are “structured” in the sense that they are to be paid periodically over time to assist a claimant to plan for their financial future and to ensure that a claimant does not squander a one-‐time lump sum payment. Structured settlements contain prohibitions against selling, assigning or otherwise alienating the payments to be made there under. Structured settlements are a popular method for settling personal injury lawsuits and wrongful death cases.
A structured settlement factoring transaction is the selling of future structured settlement payments. People who receive structured settlement payments may decide at some point that they need money immediately rather than wait until future payments are made. The reasons for this need vary but can include unforeseen medical expenses for themselves or a loved one, the need for improved housing, for education costs, or to start a new business. To meet this need, a claimant can, notwithstanding the anti-‐ alienation provisions described above, sell all or part of its future payments for a present lump sum.In order to do this, a claimant must seek approval from a judge to sell these payments. This process is more fully discussed later in this article.
When dealing with civil law, especially personal injury lawsuits and legislation involving accidents, plenty of potential lawsuits never see the inside of a courtroom. This is because the plaintiff accepts a settlement from the defendant or, very often, from the defendant’s insurance company. In order to reach a settlement, the plaintiff agrees to discontinue the legal action, and the defendant or his or her insurance company agrees to arrange for payment. That payment could be all at once in the form of a lump sum, or could be over time in the form of a structured settlement. Structured settlements result in plenty of payouts over time and the total amount could be higher because the entity paying has more time to pay. As explained in FindLaw, “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 annuities. Annuity contracts can be quite complex to cover a variety of expected expenses.”
“A structured settlement may provide a plaintiff with a substantial tax benefit,” the piece continues. “Many lump-sum settlements are considered income and must be claimed on tax returns. Funds received from an annuity are tax-free as long as the plaintiff does not control the funds. Plaintiffs who receive 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 must be managed by a professional. Proper financial planning will help make sure plaintiffs have enough funds to cover future 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 that guarantee the obligations of a bankrupt insurer will be covered. A lump-sum payment may be combined with a structured settlement to meet immediate expenses, such as medical bills, repayment of debts, rehabilitation costs, and the like. 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 allow parties who are far apart in their settlement negotiations to close the gap and reach an agreement acceptable to both the plaintiff and the defendant.”
Among the liabilities of a structured settlement are the fact that if the plaintiff “retains too much control over the structured settlement proceeds, the IRS may look at the situation and decide that the tax break must be forfeited.
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. Sometimes, an annuity is placed with brokers who do not have sufficient protection for insolvency (when financial obligations outweigh assets).
Insurance companies are usually 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 insurance companies much less than it would to make a lump-sum settlement. Without this information, however, the plaintiff’s attorney may not be able to make a complete assessment of the benefits and drawbacks of a settlement offer. In many circumstances, a settlement may be a faster, cheaper, and less stressful alternative to trial. An experienced personal injury attorney can discuss the facts of your case with you and help you decide whether a structured settlement would be your best interests.”
A structured settlement can be sold for a lump sum of cash now. Because the “present value” of money, particularly in an environment of high interest, is lower than the amount of the deferred payment, the lump sum received is typically less than the total value of the annuity payments. The assumption is that the borrower is willing to exchange that higher total value for the benefit of the lump sum funds immediately. In other words, money now is worth more to the person spending it than a greater amount of money later, but in the eyes of the lender, the exchange is one of a greater amount of value in future payments versus the cost to the lender of the lump sum paid out now. But should you sell your structured settlement? Should you borrow against all or part of it? For that matter, should you even accept a structured settlement in the first place?
“If you are ever involved in a lawsuit where you settle for a sum of money then you may be given the option of accepting a structured settlement,” writes Kathryn Vercillo. “This means that you agree not to get your payment in one lump sum at the time of the settlement. Instead, you agree to receive payments over time until the sum total has been received. There are pros and cons to accepting a structured settlement especially in terms of the financial aspect of the situation.”
Among the reasons Vercillo explains you might accept a structured settlement include the benefits to you financially, depending on what the structured settlement includes. “You pay less in taxes and may even pay nothing at all,” she writes. “Expert Law explains that accepting a structured settlement is a smart decision in terms of the taxes that you’ll pay on the money that you receive. If you receive small amounts of money over time then you will pay a smaller amount of taxes and may not even be obligated to pay any taxes on the money at all. In contrast, if you agree to a lump sum payment then a huge chunk of that money might disappear quickly, going straight to Uncle Sam. You are [also] less likely to use the money up too quickly. People who haven’t gotten financially literate and don’t know how to budget their money may find that a lump sum payment is more trouble than good. They get a big chunk of money and blow right through it, leaving nothing for later. This is especially bad in cases where the settlement is received due to an injury or accident that either requires medical care or prevents the injured party from working. That money may really be needed down the line. If you accept a structured settlement, you’ll receive regular ongoing payments and prevent the problem of blowing everything all at once.”
There are certain drawbacks inherent to structured settlements. For example, you may be carrying a large debt load, and if that’s the case, paying this off when your settlement is trickling in over time may not keep you ahead of the bills or of the interest payments on those bills. Some structured settlements are the results of a long-term issue that results in heavy legal or medical bills, for example, and in those cases, a lump sum is a lot more attractive an option.
“ Structured settlements don’t help you to make large purchases [either], she goes on. “In the same way that you can’t pay off debt all at once without a lump sum payment, you won’t be able to make a large purchase. Let’s say that your injury has caused you to want to relocate to a new home closer to your adult children. You could cover those costs with the money from a lump sum payment but may not be able to do so with just a structured settlement.”
“Because there are pros and cons to structured settlements,” Vercillo concludes, “it’s important to think very carefully before deciding to accept one if the option is offered to you. Consider the benefits and drawbacks. Before reaching a final decision on the issue, it really is wise to speak to someone with professional experience in accounting, taxes and personal finance. They can assist you in looking at your expenses, budget, spending habits and tax concerns so that you can make the decision that is smartest for your particular situation. There simply is no right or wrong answer when it comes to structured settlements; there is only what may be right for you.”
So if you do accept a structured settlement, should you accept a loan against it? The settlement may have seemed like a good idea at the time, or the extended payment structure may have been what was offered but you may now be thinking that a lump sum payment would meet your immediate financial needs better. If that’s the case, you still have options, and taking loan against all or part of your structured settlement is one of them.
Ava Lawson writes, “if you have successfully resolved a lawsuit and have agreed to periodic installments of your money over time, you are receiving a structured settlement. While this arrangement fulfills legal obligations to both parties, structured settlements can have their drawbacks, especially when unforeseen expenses occur, and large sums of cash are needed right away. [You can therefore] sell your structured settlement payments for one lump sum payout, giving you immediate access to money when you need it most. This type of funding is known as a structured settlement loan, and it’s saved many people from dire straits. Settlement loans take those prolonged installments out of the equation, giving you cash today. This isn’t a traditional loan like you’d apply for at the bank, but rather a cash advance on your periodic payments that you’ve agreed to receive. … Structured settlements function well for many people, as they can provide security for a child’s financial future, or supply a steady flow of money for lifelong medical conditions. And many plaintiffs enjoy the tax incentives that go hand-in-hand with structured settlements. However, there are certain times when life’s unexpected surprises present the need for large sums of cash, and that’s where settlement loans are instrumental. Use the money any way you wish: make a down payment on a house, pay for college tuition, cover medical expenses, or reduce existing debt – the decision is yours.”
Major Milestone Surpassed
While the total dollars is indeed substantial, it’s what these dollars represent that matters most:
They represent financial security for children whose parents were killed in automobile accidents.
They represent college funding and future scar revision for children bitten by a dog or hit by a car.
They represent a safety net for someone injured on the job who can no longer work.
They represent restored dignity for someone released from prison for a crime they did not commit.
They represent common sense tax deferral for someone selling a business or investment property.
They represent retirement income for attorneys who often are so busy they fail to address their own future post-career security needs.
They represent peace of mind for soon-to-be retirees who choose to dedicate a portion of their retirement funds to guaranteed cash flow they can never outlive.
One hundred million dollars worth of trust and confidence from hundreds of clients across the country reassures me that I made the right choice when founding this firm.
The majority of settlements in personal injury cases are lump sum payments. A lump sum payment means that the defendant (or the defendant’s insurance company) makes one payment to you, and that payment settles the case. However, instead of a lump sum payment, some plaintiffs opt to have their compensation paid out in a structured settlement. A structured settlement is when part or all of the settlement amount is paid to the plaintiff over a period of years. Part of the settlement will generally be paid to the plaintiff and his/her lawyer immediately after the settlement as a lump sum, and the rest will be structured over a period of years. Some structured settlements even involve lifetime payments. Read on to learn more structured settlement annuity companies.
How Does a Structured Settlement Work?
If you and the defendant agree on a structured settlement, the defendant (or the defendant’s insurance company) will transfer the part of the settlement that is to be structured to a different insurer, often a life insurance company that specializes in handling structured settlements. You want to make sure that the company that pays the money out over the years is very highly rated, because, if the company fails or declares bankruptcy, your structured settlement is gone. This means that there is a slight element of risk in a structured settlement.
Almost everything about a structured settlement annuity factoring company can be negotiated, including terms such as:
the length of the structure
how often you want to receive money (once a year, twice a year, monthly, etc.)
how much money you want to receive in each payment
whether you want a lump sum payment at the end, and
whether you want the payments to end if you die before the end of the structure or whether you want the payments to continue to your heirs.
Calculating the Amount of a Structured Settlement
Let’s say that you want to receive $100,000 per year for 20 years, and that you want the payments to continue to your heirs if you die before the 20 years are up. Although you (or your heirs) will be receiving $2,000,000 over the 20 years, the defendant will be paying much less than $2,000,000 to fund the settlement.
That is because a structured settlement is what is known as a "future income stream." A future income stream generally has to be calculated in terms of its present value. Present value is a financial concept that involves determining the value of a future income stream as if it were all in a bank account today.
In other words, how much money does the insurer need in a bank account, earning interest, today in order to pay you and/or your heirs $100,000 each year for the next 20 years? The quick answer is that the insurer will need substantially less than $2,000,000 in a bank account today in order to pay your structured settlement. But this is a complex financial calculation, and your lawyer will customarily hire an economist to advise him/her on how to calculate the value of the structured settlement.
Advantages of a Structured Settlement
The lump sum settlement is the traditional method for settling a case. The defendant sends you a check, you cash the check, and the case is over. You should take a lump sum settlement for all small settlements and most medium-sized settlements (less than $150,000 or so).
But if you are settling a larger case, there are two good reasons for doing a structured settlement.
First, the structure guarantees that you won’t spend the money too fast. Sadly, many personal injury plaintiffs who receive large windfalls blow through the money in an astoundingly short time, and then, maybe two or three years later, have nothing left.
Second, the structured settlement saves you money on your taxes. While the money that you receive in a personal injury settlement is usually not taxable, you do have to pay taxes on the interest and dividends that you receive on the settlement money after you invest it. That can be a large tax payment every year. With a structured settlement, you have far less money sitting in the bank, and thus a much lower tax obligation.
Advantages of a Lump Sum Settlement
The main advantage of a lump sum settlement is that you get the money now. If you need to pay off bills from the settlement, that is an important reason to get all of the money up front. If you are planning to start a business or buy a house or car with the settlement proceeds, then you need the money now. And if the settlement simply isn’t that large, you get no significant advantage from a structured settlement.
So, if you are settling your own car accident case for, say, $75,000, and the insurance adjuster is pressuring you to take your settlement as a structured settlement, tell him/her no. Tell the adjuster that you want your money as a lump sum settlement, to be paid after signing the release and other settlement documents.
