How Does a Structured Settlement Work?

If you’ve been injured and there’s a case currently pending, there’s more than one way to receive the funds ordered by the court or accepted as a settlement between you and the responsible party. One of those options is known as a structured settlement. Here are a few things you should know about this option before you decide it’s the right solution for you.

Understanding the Basics

A structured settlement is the outcome of a civil case in which it’s determined that an injured party is due compensation because of the actions of the responsible party. In some cases, the settlement amount is determined by a judge or jury after the matter is presented in court. At other times, the legal counsel for the two parties can come to an agreement and settle the matter without having to take the case to court.

When the responsible party is able to pay the agreed upon amount in one lump sum, the settlement is considered complete. When it’s not possible to pay all of the sum, the agreement includes provisions to retire the settlement amount in a series of payments. By honoring the structure or arrangement of those payments, the responsible party eventually retires the obligation to the injured party.

How Can the Payment Schedule Be Structured?

Typically, the injured and the responsible party will work with an entity that’s known as a qualified assignee. This is the intermediary who will help structure the payment schedule and ensure that the payments are made on time.

There are several ways the assignee can structure the payments. The plan may call for making a lump sum amounting to a certain percentage of the settlement. Once that payment is received, the remainder of the debt is broken into a serious of monthly, quarterly, or annual payments.

It’s also possible to structure the settlement with a series of equal payments that continue for whatever time frame the parties agree is reasonable. It’s even possible to create a schedule that includes an annual payment that’s larger than the remaining monthly payments for each calendar year. In any event, the payments continue until the debt is paid in full.

How Does an Annuity Contract Figure Into the Process?

The assignee usually secures an annuity contract that’s equal to or slightly exceeds the total settlement amount. This is to ensure that if something happens and the responsible party fails to honor any remaining payments, the assignee is protected from any loss. At the same time, the injured party will continue to receive the payments and eventually receive all the funds agreed to in the settlement terms and conditions.

While a structured settlement works well for many people, make sure the payment schedule is one you can live with for the duration of the process. Once accepted, it’s very difficult to change the amount or frequency of the payments. You also want to determine in advance if any settlement funds used to cover legal fees are subject to taxation. Assuming that you understand how the settlement will work and believe it’s the best solution in your situation, feel free to proceed.