Structured Settlements - Frequently Asked Questions
What is a Structured Settlement?
A structured settlement is a highly secure financial tool created by Congress in 1982 specifically to help ill and injured people secure their financial futures.
Structured settlements are high grade insurance contracts provided by some of the nation’s most highly rated life insurance companies. They are completely customizable, tax exempt, and virtually risk free. With a structured settlement, a person receives guaranteed payments over time, as opposed to receiving a single lump-sum payout.
Why Were Structured Settlements Created?
Industry estimates suggest more than 80% of people who receive lump-sum settlements spend or lose all their money within 5 yeas of receiving it. Historically, when injured people have run out of the money they’ve been awarded to provide for their future medical care and/or personal income, they end up becoming dependent on the government for their medical care and other basic necessities.
Recognizing this, in 1982 the United States Congress passed bipartisan legislation (The Periodic Payment Settlement Act of 1982 (Public Law 97-473)) to encourage ill and injured people to receive their awards in the form of structured settlements. Unlike one-time payouts, structured settlements eliminate the the risk of a person spending or losing their money before they need it. The tax advantages afforded to people who structure their awards are significant.
Are the Payments of a Structured Settlement Guaranteed?
Yes. Structured settlements are comprised of high grade life insurance contracts which are guaranteed by some of the the nation’s highest rated life insurance companies.
It is important to understand, a structured settlement is not an “investment”, which means it is not exposed to the risk of the stock market, nor is it dependent upon the successful outcome of any venture. All Optimus structured settlements are designed using only A++, A+ and A Rated Insurers: including: Liberty Mutual®, Metropolitan Life®, New York Life®, and Prudential®.
Can a Structured Settlement be Customized to Meet My Needs?
Yes. A structured settlement is one of the most highly customizable financial products available. Wether you need to guarantee money for future medical care, personal income, attorneys fees, tuition, tax planning, mortgages, major purchases such as homes or automobiles, or virtually anything else, a structured settlement can be tailored to meet all your individually specific financial goals and requirements.
If I get a Structured Settlement, is there a Minimum Amount I Need to Structure?
Practically speaking, there is no minimum amount you need to structure. An Optimus structured settlement can be created for an amount as little as $10,000. Structures settlements of $25,000 - $50,000 are commonplace, as are structured settlements of $5 - $10 million. The point is, almost any amount of money can be guaranteed by a structured settlement.
How Much does a Structured Settlement Cost?
Structuring your settlement does not cost you anything. Your Optimus structured settlement professional is compensated by the insurance companies which guarantee your future benefits.
Are structured settlements only for cases involving injuries and illnesses?
No. Although the majority of structured settlements involve personal injury, workers’ compensation and medical malpractice claims, many types of non-injury cases use structured settlements, including: divorce, employment, property damage, etc. It should be noted, however, structured settlements related to non-injury cases may not qualify for the tax advantages provided to injury-related claims.
What are the Advantages of a Structured Settlement over a Lump-Payment?
The advantages of a structured settlement are numerous:
- Protection from Poor Financial Decision Making: Unlike one-time payouts, structured settlements eliminate the the risk of a person spending or losing their money before they need it. With a structured settlement, money can be guaranteed available throughout a person’s lifetime.
- Low Risk: A structured settlements is a high grade insurance policy, not an “investment”, which means it is not exposed to the ups and downs of the stock market, nor is it dependent upon the successful outcome of any venture. Optimus structured settlements use only A++, A+ and A Rated Insurers.
- Peace of Mind Knowing Your Financial Future is Guaranteed: Once your structured settlement is in place, the future payments you‘ve decided on will be there, rain or shine, guaranteed. There is no worrying about your investment portfolio or the volatility of the stock markets. Your money is safe, secure and is guaranteed to be there when you need it.
- Completely Customizable: Structured can be specifically customized to guarantee your future financial goals and requirements are provided for. Structured settlements can be designed to pay money over a specific period of time, or over a lifetime, and they can distribute money annually, semi-annually, quarterly, monthly, or at any other desired interval.
- No Ongoing Management Fees or Commissions: Unlike when you give your money to an investment manger, people who structure their settlements pay no management fees or commissions.
- Tax Exempt & High Risk-Adjusted Rates of Return: Structured settlements are completely tax-exempt, which means with a structured settlement, your settlement money earns interest, tax free. To learn about the power of structured settlements’ interest tax exemption, click here.
- Preservation of Government Benefits: A danger inherent to receiving a lump sum settlement is you may jeopardise your eligibility to receive government benefits such as Medicaid and Medicare. Structured settlements can be designed to protect benefit eligibility.
- Predicable & Dependable: With a structured settlement, the amount of money you will receive and when you’ll receive it is completely predictable and guaranteed dependable. No other financial alternative can make that claim.
Can I Purchase a Structured Settlement from My Bank or Financial Planner?
Usually not. The specialized nature of and the laws surrounding structured settlements and injury-related settlement planning make structured settlements uncommonly available at financial institutions which do not specialize in structured settlement transactions. Because of their uniqueness, only a specially licensed structured settlement professional can perform this type of transaction.
Wouldn’t it be Better to Give my Settlement to an Investment Manager Promising a Higher Rate of Return?
If you’re wiling to risk losing your money, then maybe. It’s important to remember, risk and return increase in relative proportion to one another, and if you want to earn a higher rate of return, you’ll need to expose your money to more risk in order to earn it. If you’ve been injured and will need to cover future medical expenses and/or replace future income, can you afford for your money not to be there when you need it?
Ask an investment manager who promises higher rates of return to provide you with a guarantee, in writing, of a specific return on, or even the return of the money they invest for you. What you’ll find is not a single licensed investment professional or investment firm will provide you with such a guarantee.
All structured settlements, on the other hand, are guaranteed by contract, from some of the nation’s strongest and highest rated life insurance companies.
Remember, the purpose of a structured settlement is not to get you money. If you’re receiving an award, then your attorney already did that for you. The purpose of a structure settlement is to ensure you don’t lose the money you already have, i.e. the financial objective of a structured settlement is capital preservation; exactly what it should be for someone facing future medical expenses and/or the necessity of replacing lost future income.
How Significant are the Tax Advantages of Structured Settlement?
The advantages of earning tax-free interest income make structured settlements comparable to other financial alternatives which are characterized by much higher degrees of risk. As a general rule, you will save between 25% - 35% in federal and state taxes that would be otherwise subject to taxation on non-tax exempt investments.
|Tax Free Return||15% Tax Rate||22% Tax Rate||28% Tax Rate||35% Tax Rate||39.6% Tax Rate|
The Tax Equivalency Return Table above shows a Structured Settlement with a tax-free return of 3.00% is equivalent to a taxable return of 4.17% to a person in the 28% tax bracket. It shows a structured settlement with a tax-free return of 4.50% is equivalent to a taxable return of 6.92% to a person in the 35% tax bracket, and it shows a structured settlement with a tax-free return of 5.50% is equivalent to a taxable return of 9.11% to a person in the 39.6% tax bracket. What does this mean for people who structure their settlements? It means less risk and more money.
Here’s a further example: If you are in the 28% tax bracket and you structure $100,000 at a 4.00% tax-free rate of return, vs. investing your money in a financial alternative with a 4.00% taxable rate of return (which may not be contractually guaranteed), at the end of 10 years your tax-free structured settlement would be worth $153,945, while your non tax-free financial alternative would be worth only $136,659. That’s a difference of $17,286. In other words, the tax-free status of your structured settlement was able to earn 47% more money for you over the course of only 10 years.
Can I Revive the Tax Advantages of a Structured Settlement if I Purchase an Annuity After My Case Settles?
No. A claimant may purchase an annuity policy with their settlement money after their case has closed, but it will not have the same tax-free advantages as a structured settlement.
If I Get a Structured Settlement, Where Does My Money Go?
When a you structure your a portion of your settlement, the defendant in your case pays the portion you wish to structure directly to an assignment company. The assignment company is normally owned by the life insurance company providing your structured annuity. The assignment company purchases the annuity from the life insurance company and directs the life insurance company to make the future structured settlement payments directly to you; and you choose how those payments are sent: check, electronic transfer, etc.
The reason the defendant pays the portion of your award you wish to structure directly to the assignment company, and not to you, is to protect your structured settlement’s tax-exempt status. If the money for your structured was assigned directly to you, it would void the tax-free status of your structured settlement.
What is a Qualified Assignment?
A qualified assignment lets a defendant assign their obligation to make future periodic payments to a neutral third party (Assignment Company) as part of a structured settlement, which satisfies the requirements of Internal Revenue Code (IRC) § 130. The assignment companies are special purpose companies that are normally a subsidiary of the life insurance company that provides the annuity and guarantees the future structured settlement payments.
What is a Rated Age, and How Does it Affect My Structured Settlement?
A rated age is a life expectancy estimate insurance companies use to determine the cost of the life annuities they sell. A rated age affects the discount life insurance companies apply to the cost of structured settlement annuities when an illness or injury causes an annuitant to have a reduced life expectancy. A rated age ultimately affects the cost the annuitant pays for life component to their policy. For example, a 20 year old male who has suffered a brain injury may have a 26 year life expectancy compared, to a 55 year life expectancy of a healthy 20 year old. In this case, the cost of the life annuity would be discounted because the annuitant is not expected to live to normal life expectancy.
What is the Difference Between a Guaranteed Period and Life?
An annuity can pay for a Guaranteed period (i.e. at pre-determined periods for ten years), for Life (until you die) regardless of how long you live. A settlement can also be structured for a combination of the two, for life and a guaranteed period . The guaranteed period in this case is the minimum period the annuity will make payments, and, the life period means the annuity will pay as long as you live, even if your life exceeds the guaranteed period.
Example: a life and 20 year guaranteed period annuity will pay you for 20 years, no matter how long you live. If you were to die before 20 years, the annuity would pay your estate for the remaining period. The life portion of the same annuity will pay you for as long as you live, regardless of how long you live. This means, if you live longer than your 20 guaranteed period, your structure will continue paying you until you die.
What Happens to My Structured Settlement if I Die?
If you die before the end of your structured settlement’s guaranteed period, then your structured settlement will continue to pay whoever you specify as your beneficiary. In other words, you can give your structure to someone in your will.
Any annuity that has guaranteed payments has a provision that permits you to name a primary beneficiary, and a secondary beneficiary (who receives payments if your primary beneficiary is no longer alive at the time of your death). The person(s) you name as your beneficiaries will receive your remaining guaranteed payments.