The Ins and Outs of Structured Settlements
A plaintiff, an injured construction worker for example, sues her employer for failure to maintain a safe jobsite. As the jobsite is admittedly unsafe, her employer settles the case for a certain amount of money, and thus the lawsuit is terminated. If this settlement amount is large, let us say $500,000, there may be complications in receiving the bulk sum.
One initial consideration is tax consequences. Emotional and punitive damages are taxed. If the plaintiff receives a bulk sum, then as a result of being in a higher tax bracket, a greater percentage of the money will go to the federal government.
In addition, the plaintiff may have family members who will keep asking for money until the whole settlement is dissipated. The plaintiff may be young and irresponsible, or may be old and have a difficult time organizing payments to health care providers.
In these cases, the plaintiff may choose to receive periodic, e.g., monthly, distributions of the bulk settlement amount. Generally, the defendant’s insurance company will purchase an annuity for this purpose. An annuity is purchased with a bulk sum of cash, and then the annuity company will pay this sum out over time, with earnings at a set annuity rate. The annuity company predicts that the general interest rate will be greater than the annuity rate, thereby making a profit.
This annuity rate consideration hints at the chief disadvantage of a structured settlement: that the plaintiff will, in the end, receive less money than she would have just accepting the bulk payment. For example, the defendant insurance company can over-represent the total settlement; the defendant often uses its own subsidiary from which to purchase the annuity; and the plaintiff’s lawyer can receive a kickback for referring the plaintiff to a certain annuity provider. In order to prevent other parties from getting their “fingers in the pie,” as it were, and if the total settlement value makes it sensible, plaintiffs may want to hire an independent financial advisor to get disinterested advice.
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Last Modified: 05-08-2009 04:08 PM PDT
