Lump-Sum vs. Structured (Installment) Settlements
In brief, Structured Settlements are just what they sound like. They are agreements in which payments are made in more than one installment. They may be structured in a variety of ways. A simple type would involve an initial payment followed by a second and then a final payment several years later. On the complicated end of the spectrum, an example could consist of an initial lump-sum payment, monthly payments continuing throughout the plaintiff's life, with an escalation clause that increases payments in order to neutralize inflation, decennial lump-sum payments which may or may not increase, endowments for the education of the plaintiff's children, a reversionary medical trust, and term insurance to cover the cost of burial or to provide for the care of the plaintiff should his wife or parents (in the case of a minor) predecease him.
Lump-Sum Payments and Structured Settlements
Historically speaking, monetary awards to an injured plaintiff, whether the result of a jury verdict or an out-of-court settlement, have been made in a single, lump-sum payment. As once noted by the United States District Court for Pennsylvania, "the common law for a single lump-sum judgment.. There can be no judgment for an indefinite amount, or a judgment payable in installments."
The validity of the lump-sum payment system, however, has recently come under increased scrutiny as the frequency and amount of settlements and verdict awards alike continue to climb at seemingly unfettered rates. Not long ago, verdicts of $1 million or more were the exception; now they seem almost the rule.
With each successive payment of such awards, defendants and their insurers grow acutely aware that alternative means of payment must be implemented to save themselves from financial ruin. The alternatives which have been effected with a fair degree of success are the use of structured settlements and the enactment of periodic payment of judgments statutes.
Everyone May Benefit
It is possible for everyone concerned in a structured settlement to reap benefits from its use. Insurance companies, for example, are able to reduce their costs. Plaintiffs' lawyers may be able to take advantage of some tax benefits they would not receive if they were to take their fees in a single lump sum. (By electing to have their fees paid over a period of years, attorneys may achieve a form of income averaging not otherwise available.)
The plaintiff, of course, benefits most from the use of a structured settlement. Periodic payments allow protection from at least three sources: himself; his friends and family; and the government.
Studies show that as many as 90 percent of those who receive substantial "windfalls"–be they settlements, sweepstakes, or lotteries–will have squandered the entire sum within five years, leaving them as public charges dependent upon welfare, health care assistance, and the like.
The reasons for this are varied. Many plaintiffs who receive large awards find themselves unprepared to be in the position of financial investor. Lacking the requisite experience in this risky profession, they inadvertently mismanage and dissipate their investments in short order. Others find themselves subject to the onslaught of mercenary friends and relatives who are often successful at taking advantage of the plaintiff's "good fortune." These two risks are virtually impossible to prevent without a structured settlement.
A plaintiff may also benefit from the use of a structured settlement through certain tax advantages which would not be available were he to receive the entire sum at once. The Periodic Payment Settlement Act of 1982 (H.R.5470) excludes from gross income compensatory damages for personal injuries received as lump-sums or as periodic payments. When a defendant insurance company purchases a single premium annuity contract and retains control of it, the income received by the plaintiff from this contract to settle a damage suit are excludable from his gross income.
The plaintiff avoids "constructive receipt" of the corpus and thereby avoids any liability for taxes on the earnings therefrom.
A plaintiff may further benefit by accepting a structured settlement since he may receive an overall larger award. The defendant insurer, while often unwilling to pay out say $1 million in a lump-sum payment, may be very willing to pay out twice that amount over a period of years through an annuity in small periodic installments.Structuring a SettlementUp-Front Cash Payment – A structured settlement may include an initial up-front, lump-sum cash payment to reimburse the plaintiff for medical expenses incurred, wages lost, and pain and suffering endured. Attorney's fees may also be included, unless the trial lawyer has elected to have these paid in future installments.
When necessary, this initial payment may include funds to purchase a specially equipped van for the plaintiff; to make alterations to the plaintiff's home or to purchase a new home; to buy a wheelchair or prosthetic device; and for similar rehabilitative needs. An additional amount may be included to provide a reserve for the plaintiff should some unforeseen expenses arise. And should there be any prospective claims for loss of consortium or other actions on behalf of someone other than the injured party, many attorneys settle this sum and have it included as part of the up-front payment.
Periodic Payments – While trusts and other instruments may be utilized as alternatives, the basic tool for providing for the future payments is an annuity purchased from a life insurance company. The life insurance company from which the annuity is obtained may have an "A" or higher rating from Best's Review. The advantages in using an annuity rather than other means is that they are inherently flexible and can be adjusted and adapted to fit most every need.
Built into the periodic payments may be an escalation clause. As noted earlier, when the insurance company is unwilling to provide a figure higher than 4 % compounded annually, periodic lump-sum payments every ten years or so can also be included in the program.
The payments should be guaranteed over a fixed period to provide for the contingency of the plaintiff's early death. If at the end of the fixed period the plaintiff is no longer living, there should be an additional lump-sum payment made to his wife and children, or in the case of a minor plaintiff, his parents.
Settlement Proposals & Annuity Quotations
Annuity Shopper Settlement Services can design annuity proposals to provide for the financial needs of your clients. We pride ourselves on our excellent service and creativity, approaching the financial questions from a different perspective than the involved parties. We often come up with innovative solutions that are more effective than those developed from any one point of view.
We also provide annuity quotation and placement facilities for many different life insurance and investment sources. As you may know, the price of a specific payment stream is not rigid, and does in fact vary from carrier to carrier. For example, to provide a monthly income for a 20-year-old female quadriplegic, the following quotes were calculated: $480,000, $412,000, and $375,000. With similar variations in cost a common daily feature of annuities, it behooves the purchaser to "shop" the markets for the most economical contract. We can supply you with a range of bids to insure the best annuity for your money. And our written quotation proposals can be sent to you by overnight mail or promptly faxed to your office.
Working with our consultants you may specify the financial ranking of the carriers from whom you'd consider purchasing the annuity. We represent over 20 companies with Best's ratings of A or better. We can provide you with quotes from New York domiciled insurers as well. Wherever possible, a medical history of the injured party should be available for submission to the insurance company actuaries. This will allow an evaluation of risks that may turn out to be more favorable to the plaintiff and the carrier and thereby reduce the cost of your plan. Our annuity specialists will also verify that the annuities to be purchased are in accord with the Settlement Agreement and Release, if you make a copy of the same available to us.
Annuity Shopper Placement Services
Annuity Shopper's large annuity-tracking database closely monitors the rates of all the most competitive life insurance companies. This extensive system spares you the trouble of having to search for the best annuity values on your own. And we cover every type of annuity situation–from pension terminations and employee retirements to structured settlements, business buyouts, estate, divorce, and pro-sports applications and much more.
We're proud of our outstanding performance: researching and placing a record $135,000,000 in annuity premiums this past year alone. You won't find a better recommendation than that.
Our combination of personal investment attention and superior back-up makes us the No. 1 annuities firm in the nation. We have the unique data resources to consistently formulate the most economical solutions. And our unrivalled marketing experience gives us the clout to negotiate with the best carriers to your advantage.
Our specialized annuities research and placement approach works! We're confident that our experience will guarantee you significant savings in the cost of your annuities. Call us today at 800-872-6684. We'd like to get right to work for you.