Rupp: Making the Most of Your Settlements

Tuesday, July 24, 2018 | 0

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.

Katharine Rupp

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 (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 his 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 (financial challenges, creditors or needs-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.  

Katharine Rupp is a settlement strategies consultant at Medval. This post from the Medval blog is republished with permission.