The reasons for using a structured settlement in place of, or, more likely, in addition to a lump sum settlement are four-fold: (1) the opportunity to receive tax-free guaranteed income, (2) money management, (3) flexibility, and (4) financial security.
The Opportunity to Receive Tax-free Income: The most attractive feature of a structured settlement is the rate of return advantage it offers because of its tax-free nature. All payments received from an annuity purchased by the defendant, as part of a personal injury settlement including interest earned on the original annuity investment, are tax-free when received by the claimant. Income from investments made with the proceeds of an all-cash settlement are taxed at federal income tax rates of up to 39.5% as well as state income taxes in most states. The rate of return advantages offered by a structured settlement annuity are discussed in greater detail in other sections.
Money Management: The loss for which the claimant is receiving a settlement is most likely one that will be incurred over a period of time. In other words, the loss of income or increase in medical expenses may last over a number of years, perhaps even a lifetime. The most secure way to assure that the claimant will have the funds to replace future losses is with a settlement that makes payments over the same time period as the anticipated financial loss. There is strong evidence that claimants are subject to overwhelming pressure by family and friends to prematurely spend their settlement awards paid entirely in a one-time lump sum.
Flexibility: Payments can be scheduled with unlimited flexibility, with the timing and amount of payments fixed at the time of settlement. For example, payments can be made on a monthly, quarterly or annual basis. They can be structured to increase periodically to allow for inflation. Payments may run for life or may end at a specified point in time. Larger one-time payments can be scheduled at specific times in the future to provide for anticipated costs, such as college tuition expenses, house purchases or extraordinary medical care.
Financial Security: Prudent investors will only be interested in investing in financially strong insurance companies with which Settlement Advisors places annuities. All of these insurance companies have one of the three highest ratings from A.M. Best, which is the major firm monitoring the financial strength of insurance companies. The insurance companies with which we deal also have very high ratings from one of the other ratings firms, such as Standard & Poor’s and Moody’s.