By: Patrick C. Farber | As featured in the January 2013 issue of SCAHRM Quarterly – What’s Happening Now
Structured settlements have long been an attractive option when negotiating a personal injury case. When a structured settlement is used, all sides can benefit by its risk mitigation properties.
Structures are used in a variety of injury cases. The most common involve wrongful death, (especially if a surviving spouse or children need income), temporary or permanent disability and severe injuries with shortened life expectancy.
Structured settlements provide guaranteed, secure, predictable tax-free payments under IRC 104(a)(2), designed to meet the claimant’s needs over time. The structures are flexible to allow for funding for a claimant’s future expenses (i.e., schooling, new car or home purchases, retirement). Most claimants have limited investment or financial skills, especially when it comes to investing large sums of money. A structured settlement takes away the temptation to spend the funds on questionable investments or schemes that can deplete the funds and leave the clamant destitute.
While current interest rates on the securities found in structures are low, the structures offer competitive tax-free returns compared to taxable returns. The structured settlement program can be integrated with other asset management options and with a trust.
For insurance companies and their legal counsel, structured settlements reduce administrative and legal expenses by eliminating the need for trial and appeals. Structures bridge the gap between the defense offer and the plaintiff’s demand and remove the potential for a future bad faith claim.
On the claimant’s side, structures are seen by plaintiff’s attorneys as a way to avoid the expenses, hazards and unknowns of trial and fulfill their professional duty of obtaining the best settlement for their client. It also gives plaintiff’s attorneys the opportunity to structure their own fees.
Life Care Plans
Often the largest component of economic damages in personal injury cases is the cost of future healthcare. Much diligence is placed in creating detailed plans for the type of care that injured individuals will need for the rest of their lives. For example, a 64-year-old female with a chronic nervous system disease is found to need a structured life care plan that calls for once-a-year physical therapy evaluations, weekly physical therapy, occupational therapy and psychologist visits, 24 hour in-home nursing care for life as well as routine medical checkups.
Costs for this care (along with other living expenses) are outlined in a life care plan when determining the structured payments required by the injured party. These plans are a key element in settlement negotiations.
Medical Rated Age
Using a medical rated age for an injured party is common in cases where severe injuries shorten life expectancy. An injured party’s rated age plays an important role in determining settlement payouts.
For example, an injured male is 40, but because of his injuries or other factors, his medical rated age is 50. Using a medical rated age in his case reduces benefit costs for life companies because the injured party is not expected to live as long as a healthy person who is the same age. Thus, the income stream he will receive will be shorter.
For the severely injured claimant, he will receive increased benefit payments early on because the benefits are calculated on their shorter rated age instead of the longer chronological age of a healthy individual. More money is available upfront to ensure injured individuals have the highest quality of life for their situation.
Younger injured parties (under age 50) can often benefit from the use of an inflation-adjusting component in their structured settlement. This means their payouts gradually increase (typically at a 3 percent compounding rate). For older injured parties, however, an inflation component is counterproductive. The person’s life expectancy does not warrant it.
For example, if a 50-year-old male were awarded a $1 million annuity settlement, he would receive approximately $4,000 every month for 32 years (his life expectancy). When using a 3 percent inflation component, however, he would receive only $2,600 per month the first year, which would increase gradually, but not reach $4,000 per month until the 16th year. The approximately $1,400 difference each month over 16 years adds up to about $150,000 of tax-free income. In most cases, he could probably make better use of the larger monthly amount earlier in life—while he is in his 50s and 60s, or he could decide to invest or save the extra cash for use in his 70s and 80s. By deciding against the inflation component, he has more options for his money.
Whatever the level of injury or age of the claimant, a negotiated structured settlement can provide the financial security and peace of mind that many injured parties and their families are seeking.
Patrick C. Farber is a structured settlements broker in California. He specializes in settling medical malpractice, physical injury, non-physical injury, product liability, workers’ compensation, mass torts, punitive damages, employment and elder abuse cases with structured settlements in court hearings, arbitrations and settlement conferences. 800-734-3910, firstname.lastname@example.org