FAQ for Injured Parties

Structured settlements came about in 1982 when the U.S. Congress passed The Periodic Payment Settlement Act of 1982 (Public Law 97-473). The act enables injury victims to obtain customized structured cash payments plans through insurance annuities that assure them guaranteed, tax-free income over time. Previously, most settlements were paid out in lump sum cash payments with any money earned from the settlement subject to taxation. Injured parties, usually unaccustomed to receiving large sums of money, quickly went through their settlement proceeds and were soon left with nothing.

During settlement negotiations, plaintiff and defendant attorneys determine the injured party’s ongoing medical care, living and family needs (i.e., possible future medical treatment, in-home nursing expenses, college tuition for dependent children, adjustments to living quarters). Once the injured party’s needs are determined and a dollar amount assigned, the defendant (or its insurance company) agrees to the settlement and funds the obligation by purchasing an annuity from a high-rated life insurance company. This insurance carrier or “assignee” then takes over the liability from the defendant and begins making periodic payments to the injured party.

Structured settlements are often created for individuals who want guaranteed tax-free income over the course of several years or for a lifetime. Here are typical scenarios:

• Temporary or permanently disabled injured parties.
• Individuals attempting to retain some portion of their settlement for future use.
• Total or partial wage loss for any period of time.
• Guardianship cases, including minors.
• When the settlement is a large portion of all of the injured party’s future support.
• As an alternative to investing part of settlement proceeds.
• Severe injury, especially shortened life expectancy, and the mentally incompetent.
• Death cases with surviving spouse and/or children needing monthly/annual income.
• Deferred payments for college funds, retirement, mortgages or attorney fees.
• Workers’ compensation cases.
• Any case where a secure, tax-free, high yield income makes sense.

For injured parties, structured settlements provide a tax-free income stream, possibly for life, without fear of money mismanagement or market fluctuations. Typically, future income and upfront cash for attorney fees, medical expenses and related liens are included in the package. In the event of the injured party’s death, a guaranteed (also tax-free) portion of the settlement maybe made to the estate or a named beneficiary such as a spouse or child. To qualify for the income tax benefits of a structured settlement, the recipient cannot accelerate, defer, increase or decrease the payments. The payments also must be fixed and set at the time the settlement is created. The money used must come from the defendant or its insurer in an amount no greater than the original liability.

State and federal solvency standards and regulations protect annuity policyholders in a number of ways. Regulators use conservative accounting and investment rules, which keep insurers from investing heavily in risky investments. Investments are typically high-quality investment grade fixed income securities. Structured settlement annuities enjoy competitive returns compared to other conservative investments in addition to their tax-free status. In California, companies offering structured settlements must be first approved by the California Department of Insurance. The department evaluates the insurance carrier’s solvency and whether the carrier complies with California regulations. Carriers are also subject to mandatory annual audits and other financial compliance requirements. By regulation, all annuity reserves must have assets that are equal to or exceed the corresponding payment obligations. In addition, the assets supporting these reserves may not be removed from the life insurance company. Reserve sufficiency is mandatory and is frequently monitored by state legislators and auditors. State insurance commissioners have developed these regulations to preserve the solvency of general accounts in which assets are held so that contractual obligations to policyholders are met. These general accounts support only the obligations of the insurance companies–and not the obligations of a parent company or other subsidiaries.

Yes. After the injured part passes away, a structured settlement can dictate that any remaining annuity sums be paid in continuing periodic payments for a specified number of years to a beneficiary or beneficiaries.

No. Once a structured settlement is ordered, it may not be altered. You may only receive money from the annuity on specified dates in the original structured settlement agreement. The structured settlement, however, can offer great flexibility. Money can be designated to be paid on specific dates or for future education costs, a new car, even a new home.

Yes.  Factoring companies, which also buy lottery winnings, casino jackpots and other annuity-based payouts, use television and print advertising to reach individuals with structured settlements, offering to buy the settlement annuities at deeply discounted rates and paying the individuals a lump sum. (These lump sums are fully taxable, unlike annuity payments.) Settlement buyouts require court approval. If the buyout is in the "best interest" of the injured party, the court approves the sale. California SB510, signed into law in 2009, gives the courts explicit guidelines to decide whether a buyout is appropriate. Some of these guidelines include a review of the injured party's current and future financial needs, whether the party has received independent legal and financial advice concerning the buyout and if the "discount rate" proposed by the factoring company is in keeping with current market rates. The courts req