A structured settlement is a financial or insurance arrangement whereby a claimant agrees to resolve a personal injury claim by receiving periodic payments on an agreed schedule rather than as a lump sum. Structured settlements are often used to resolve workers’ compensation insurance cases in which the negotiations between the plaintiff’s attorney and the insurance company have reached an impasse. The responsibility of future payments to the plaintiff falls on an independent third party—usually a life insurance company from which an annuity has been purchased by the workers’ compensation insurer.
Congress has encouraged the use of these settlements through the federal tax code since 1983. Internal Revenue Code section 104 specifies the amount of each payment, and the earnings on payments are excluded from the settlement recipient’s income.
Not all payout schedules from a structured settlement are alike. There are three main forms of periodic payments from a structured settlement:
An initial lump-sum payment can be included in the settlement to cover such items as housing and transportation, and the settlement can also be structured to increase periodic payments at fixed dates in the future to account for inflation.
Structured settlements are helpful for the injured worker in compensation cases. They can be set up to provide tax-free money for long-term and immediate needs, while eliminating the worry of managing a large amount of money. In most cases, a structured settlement will provide more money over the long term than the employee would realize from a cash settlement. The plan can be structured around age and life expectancy, thereby providing funds for maintaining medical treatment, future surgeries, and replacement of durable medical equipment.
The closure of the claim, expedited through a structured settlement, is a major benefit to the employer. It also avoids the uncertainty of litigation and all of the expenses that go with it. In the case of a disability that lasts a lifetime, all of the mortality and investment risk is transferred to the third-party insurer.
Insurers benefit because they free up money that would have been used for a lump-sum settlement and can now concentrate on other cases.
The employee’s lawyer has a satisfied client for whom he has provided financial stability.
A structured workers comp settlement is a flexible tool for resolving troublesome claims. Keep in mind, however, that each state has different laws with regard to settling workers’ compensation claims. Be sure to partner with a professional who can confirm the laws of your state.
For more information and advice on workers compensation insurance, contact us online or give us a call at (800) 947-1270 or (610) 775-3848.