What is a Structured Settlement?
Historically, damages paid out during settlement of personal physical injury cases were distributed in the form of a lump-sum cash payment to the plaintiff. This windfall was intended to provide for a lifetime of medical and income needs. The claimant or his/her family was then forced into the position of becoming the manager of a large sum of money. In an effort to create a more financially stable arrangement for the claimant, the Structured Settlement was developed.
A Structured Settlement is an alternative to a lump sum cash payment in the resolution of personal physical injury, wrongful death, or workers’ compensation cases. The settlement usually consists of two components: an up-front cash payment to provide for immediate needs and a series of future periodic payments which are funded by the defendant’s purchase of an annuity policy or United States Treasury Securities. Those payors make payments directly to the claimant. In the unfortunate event of the claimant’s death, a guaranteed portion of the settlement may be directed to a beneficiary or his/her estate.
A Structure is a guaranteed source of funds paid to the claimant or his/her family on a TAX-FREE basis. Section 104(a)(2) of the U.S. Internal Revenue Code states that compensation for personal physical injuries or sickness – whether paid as a lump sum or as periodic payments – shall be tax-free. It is difficult for even the most confident investor to match the rate-of-return guaranteed by a Structure.