In 1982, the U.S. congress passed the Periodic Payment Settlement Tax Act. This Act established structured settlements. In a civil case, there’re two parties; the party that files the lawsuit (plaintiff), and the party at fault (defendant).
During this case, the plaintiff might decide to go forth until they win the case and get compensation. The two parties can also choose to settle outside court.
This means that they’ll have to agree on a settlement amount that works for both parties. The defendant’s team will pay the agreed amount. The plaintiff can decide to get a lump sum payment or opt for a structured settlement.
What is a structured settlement, and should you choose one? Here’s everything that you need to know about structured settlements.
What is a Structured Settlement?
With that said, a structured settlement is a payment made by the defendant in an annuity. Structured settlements are typical in civil cases including:
- Personal injury
- Wrongful death
- Worker’s compensation
- Medical malpractice
More often than not, the above cases end up with large amounts of payment for the damages caused. The plaintiff is then at liberty to decide how to receive the amount, depending on their needs. This means that during agreement on structured settlements, the plaintiff requests three things:
- How often they receive the payments
- How much payment they receive each period
- When payment should begin
The main reason a plaintiff opts for structured settlement is for financial security. However, there are other benefits included, as well.
Should you Choose a Structured Settlement?
The most significant benefit of this settlement option is that it’s tax-free. But, why should you opt for a structured settlement versus a lump sum payment?
1. To Receive Financial Security
When you receive lump sum payment, you’ll most likely overspend it. Getting periodic payments means you’re always funded, hence having financial security on long-term. Even when you feel like you’ve your budget figured out, it’s safer to know that you still have extra money.
2. You Choose When to Receive it
As earlier mentioned, you’re at liberty to decide when and how much to accept each period. If you’ve an emergency, you can request payment to begin immediately. If you currently have other sources of income, you can request payments at a later date.
Can One End the Periodic Payments Earlier than Agreed Term?
This is the other upside to structured settlement contracts. You may have requested a three-year payment plan, but a costly emergency comes up. Unfortunately, once you’ve signed the settlement contract, changing it becomes close to impossible.
You can sell the settlement contract, and receive the remaining payment all at once.
Are the Periodic Payments Guaranteed?
The process of structured payments protects both parties from such periodic payment situations. To be safe, the defendant pays the lump sum to a financial institution. The financial institution should be either a bank or an insurance company.
It’s this institution that’ll be making the payments into your account. This way, you don’t have to worry about missed payments.
Do you have a Retirement Plan?
Now that you know what is a structured settlement, it’s easy to decide whether it fits your needs. If you have a reliable income that can sustain you, then make this payment your retirement plan. The good thing is, even in your absence, the institution will send the payments to your next of kin.
Thinking about retirement? Check out more tips on how to prepare for your retirement at any age.