Structured Settlements 101: Making the Most of Your Settlements

Medicare Set-Aside Blog, Structured Settlements on July 3, 2018
Posted by Katharine Rupp, JD

Structured settlements are regularly overlooked as a viable and valuable option for funding a settlement. They are commonly perceived as extremely complicated and the potential benefits are often overshadowed by the temptation of a large lump sum payout. However, in practice, structured settlements are incredibly simple.

What is a Structured Settlement?

Structured settlements are settlements that use a combination of lump sum cash payments and annuities to fund a total settlement. An annuity is an investment vehicle backed by a life insurance company that offers guaranteed, tax-free, periodic payments. Annuity payments are entirely customizable to a claimant’s needs and financial goals.

All aspects of a liability or workers’ compensation settlement can be funded with an annuity, including indemnity, future medical, Medicare Set-Aside arrangements, and even attorney fees. Payments can begin immediately upon settlement or deferred to a later time. In fact, payment schedules can be designed using periodic payments (i.e. weekly, monthly, annually, etc.), single lump sum payments, or any combination thereof.  

With the Temptation of a Lump Sum, Why Structure a Settlement?

There is a common misconception that a structured settlement requires more work for a claims organization.  In fact, it just the opposite.  With structuring a settlement comes the added bonus of obtaining a dedicated structured settlement consultant, a free resource for an adjuster and a claims department.  A structured settlement consultant can attend meditations, assist with preparation of settlement documents, and explain the value-added benefit of a structured annuity to adjusters.  In addition, a structured settlement almost always costs an organization less than a lump sum payment would, and the savings achieved opens up a variety of creative settlement options otherwise unavailable.  While the temptation to fund a settlement via a lump sum is always present, the benefits of having both a structured settlement consultant and the ability to use annuity savings as a settlement tool is definitely something to consider.

Moreover, structured settlements offer a level of security and flexibility that lump sum payments do not. With lump sum settlements, a claimant is left to manage the funds alone; opening themselves up to the potential of mismanagement of funds, premature exhaustion, creditor interference, and tax liabilities. Structuring a settlement avoids these issues, and other common roadblocks to settlement, by offering the following benefits:

  • Fixed guaranteed payments with a reasonable rate of return. Payments can be made on any schedule a claimant desires. The flexibility of payments allows for income continuity and security.
  • Protection from premature exhaustion of funds. Funding a settlement with an annuity combats the temptation of a windfall, while providing structure for claimants, who may be inexperienced with financial planning or management of large sums of money.
  • Shelter from creditors. Through use of a structured annuity, there are various protections from creditors, which provides another added level of security.  Moreover, annuities purchased with settlement funds cannot be attached in divorce or bankruptcy proceedings.
  • Tax-free income. All annuities funded with settlement proceeds have unique tax benefits. Unlike investments funded using proceeds from a lump sum settlement, all annuity payments and their returns are completely tax free.
  • Conservation of needs-based entitlement program benefits. Lump sum settlements can interfere with a claimant’s income calculations for purposes of obtaining and maintaining benefits from needs-based entitlement programs. Conversely, settlements funded with annuities can be structured in a way that avoids any interference with a claimant’s needs-based benefits. Especially when combined with a special needs trust.
  • Faster, more efficient settlements. Proposing a structured settlement sets the stage for collaborative settlement negotiations. It shows the claimant that their needs and future well-being are equally important to the insurer as they are to the claimant.

Efficient Settlements Through Guaranteed Income.

A structured annuity is a tool that can help bridge any gap between a claimant’s demand and an insurer’s settlement authority; resulting in a smooth and efficient settlement process for all parties.  All while yielding a steady and guaranteed stream of income.  In considering if a structured settlement is right for your claim, or on behalf of a claimant/injured worker, consider these three questions:

  1. Are there concerns about the claimant’s/injured worker’s ability to manage a large settlement?
  2. Are there additional tax obligations to consider?
  3. Are there other monetary factors (i.e. financial challenges, creditors, or need based entitlement programs) that should be considered in the settlement?

If you can affirmatively answer “YES” to any of the questions above, a structured annuity may be of extreme benefit to your case, and all parties involved.  

At MEDVAL we offer comprehensive and customizable settlement solutions.  Our in-house brokers are different from others in the industry, as they bring with them not only decades of experience settling claims, but also backgrounds in law and Medicare Secondary Payer compliance.  Our expertise allows us to provide the best and most thorough advice on each case.  For more information, please reach out to a member of our team at: structureteam@medval.com.