announcement

Update: Check new design of our homepage!

What is a Structured Settlement?

What is a Structured Settlement? Know All About This Theory Now

It pays to have a payment agreement that works for both parties, when an understanding goes sour and the matter is taken up in court. Once a structured settlement is ruled, the periodic payment obligation helps the wounds heal faster!
WealthHow Staff
Last Updated: Jun 3, 2018
The federal and state legislatures have realized the importance of structured settlement laws and regulations. While the Internal Revenue Code works at the federal level to ensure the application of these laws, the state settlement laws are taken care of via protection statutes and payments of judgment statutes that are made periodically. Even the medicare regulations exert a major impact on settlements and in order to ensure the benefits to the claimant, payments are now being incorporated within the special 'Set Aside Arrangements' and 'Special Needs Trusts'. This mode has been endorsed by many disability rights organizations, to make it easier on the special needs of the beneficiaries under their care.

Arrangement

The meaning of structured settlements has been clearly defined and explained to meet the application requirements for federal income taxation. It has been understood as an arrangement that must be established via an agreement for periodic payment towards damages, that are not included within the established 'excludables' of gross income under the legislation applicable in the Internal Revenue Code. It is the segmented or periodic payment of compensation, with regards to workers' compensation law, that is not included as per the code. Settlements are payable by an entity who is a party to the suit, or agreement, or to a workers' compensation claim. It is applicable to a person who has taken on the liability involved in segmented payments, in accordance with the Internal Revenue Code.

Legal Implications

A structured settlement typically involves the injured party, who is also the claimant, who agrees to a settlement with the defendant or the insurance carrier in order to dismiss the existent lawsuit, in return for a series of periodic or preset segmented payments over a stipulated period of time. Under such an agreement, the insurer ends up with a long-term payment obligation towards the claimant. In order to fund the established obligation, the insurer can adopt any of the two approaches. It can either purchase an annuity from some life insurance company or assign and delegate the accepted periodic payment obligation to a third party. The latter is referred to as an 'assigned case'.

Understanding the 'Assigned Case'

Here, the insurer basically prefers to refrain from the long-term periodic payment obligation issued and accepted within the paradigms of the law. Accordingly, it transfers this obligation via a 'qualified assignment' to a third party or the 'assignment company'. The assignment company, which usually is the life insurance company from where the annuity is purchased, requires the insurer to make a payment towards securing an annuity to fund the periodic payment obligation. However, if the claimant agrees to the transfer of the segmented payment obligation, then the defendant does not bear the liability of payment. The 'assigned case' method is sought by companies that do not wish to carry the periodic payment obligation on their books.

Understanding the 'Unassigned Case'

In an unassigned case, the insurer bears the periodic or segmented payment obligation issued by law, by purchasing an annuity from a life insurance company. The annuity works like an asset that helps the company to fulfill its obligation. The payment option agreed upon is exact to the legal acceptance, with regards to time and amount. The property or casualty company owns the annuity and declares the claimant as the payee, making arrangements for the stipulated payments to be sent directly to the claimant. In the case of the segmented payment option being dependent on someone continuing to be alive, then the claimant becomes the 'measuring life' under the annuity.