What is a Structured Settlement and how does it apply to an Auto Accident Claim?
At times a lawsuit is necessary to obtain damages in an auto accident claim, but in some instances the dispute may be resolved through a pre-trial settlement. A settlement is where the parties involved in an accident sit down with each other and their insurance representatives in order to reach a desired agreement with regards to monetary payments.
Specifically, the monetary payments may take the form of a structured settlement wherein the defendant agrees to render payments to the plaintiff in periodic installments, such as monthly payments. This is in contrast to a lump sum payment, where the plaintiff receives money all at once in a single payment. Structured settlements may be useful when the auto accident settlement involves an unusually large sum of money.
I’ve also heard of the Phrase “Annuity Payment” - Are these available in an Auto Accident Settlement?
Yes. An annuity payment simply refers to the method by which the defendant’s insurance company obtains funds to make the settlement payment to the plaintiff. The way it generally works is that an annuity company sells an annuity payment package to the defendant’s insurance provider. The annuity company will then disperse the plaintiff’s settlement proceeds in monthly payments. The annuity company usually charges a fee or annuity rate in order to make a profit on the transaction.
An annuity is basically a contract ensuring that there are sufficient funds to pay the plaintiff’s settlement award. In auto collision cases, annuities may be a necessity if a large amount of money is involved.
What are the Pros and Cons of Structured Settlements and Annuities as Opposed to a Lump Sum Payment?
In settlements involving a very small monetary award, a structured settlement will usually not be necessary. However, in more serious cases (for example those involving the loss of life or severe damages) structured settlements are an option. Advantages and disadvantages of structured settlements are:
Structured settlements tend to deter or avoid money mismanagement issues, as people tend to overspend when given a lump sum payment.
Many people who are disabled as a result of an auto accident can become dependent on government subsidy after their lump sum payment is exhausted. Annuities help distribute the funds over a longer period of time.
Substantial tax breaks can accompany structured settlements, as annuities are typically tax-free so long as the plaintiff is not in control of the funds.
Annuity payments are typically managed through a financial professional, and can be further tailored to fit the plaintiff’s needs. They may also be combined with a partial lump sum payment to meet immediate financial needs.
The government may decide to revoke the tax benefit if the plaintiff retains too much control over the settlement proceeds.
Although state insurance laws usually provide for protection in case an insurer goes bankrupt, insolvent insurers can still present complications such as delays in payment.
Economic conditions could result in lower monthly payments; therefore some plaintiffs prefer an immediate lump sum payment.
Since there are several actors involved (the parties, their insurance company, and possibly an annuities company), structured settlements can sometimes result in a lower overall payment to the plaintiff as opposed to a lump sum payment.
Do I need a Lawyer to assist me with a Structured Settlement Payment?
The plaintiff needs to make an informed decision as to the form of payment. Many of the drawbacks associated with structured settlements can be alleviated if the plaintiff has employed the services of a professional such as a financial advisor or a lawyer to help them manage their payments.
The laws governing annuities can be very complicated and can vary from state to state. Since most settlements already require the presence a lawyer, they should be able to advise you in deciding on the form of settlement payment. You should approach a settlement award much as would any significant financial increase - prudent measures are often beneficial in the long run.