FAQs for Injured Parties

Clients have three payment options when their claim or lawsuit is settled:
1) a lump sum cash settlement,
2) periodic payments through a structured settlement annuity or
3) a combination of cash and structured payments.

In years past, personal injury settlements always involved lump-sum payouts. While the payout was tax-free, the settlement proceeds were taxable unless invested in tax-free products. The Internal Revenue Service allows defendants in physical injury cases to purchase insurance annuities to fund structured settlements to the injured parties, with all proceeds from the annuities tax-free.

Using annuities, injured parties receive guaranteed tax-free income issued by an A or A+-rated life insurance company. Injured individuals can choose to receive 100 percent of the funds through a structured settlement annuity, or a combination of an annuity with a cash component for immediate or emergency needs.

Structured settlements became popular in 1982 when the U.S. Congress passed The Periodic Payment Settlement Act of 1982 (Public Law 97-473). The act enables injury victims to obtain customized structured cash payment plans through insurance annuities that assure them guaranteed, tax-free income over time.

Previously, most settlements were paid out in lump sum cash payments. Injured parties, usually unaccustomed to receiving large sums of money, occasionally went through their settlement proceeds and were soon left with nothing.

During settlement negotiations, plaintiffs and their attorneys determine the injured party’s ongoing medical care, living and family needs (i.e., possible future medical treatment, in-home nursing expenses, college tuition for dependent children, adjustments to living quarters).

Once the injured party’s needs are determined and a settlement takes place, the defendant (or its insurance company) agrees to the settlement and funds the obligation by purchasing an annuity from a high-rated life insurance company. This insurance carrier or “assignee” then takes over the liability from the defendant and begins making periodic payments to the injured party.

Structured settlements are often created for individuals who want guaranteed tax-free income over the course of several years or for a lifetime. Here are typical scenarios:

• Temporary or permanently disabled injured parties.
• Individuals attempting to retain some portion of their settlement for future use.
• Total or partial wage loss for any period of time.
• Guardianship cases, including minors.
• As an alternative to investing part of settlement proceeds.
• Severe injury, especially shortened life expectancy, and the mentally incompetent.
• Death cases with surviving spouse and/or children needing monthly/annual income.
• Deferred payments for college funds, retirement, mortgages or attorney fees.
• Workers’ compensation cases.
• Any case where a secure, tax-free, high yield income makes sense.

For injured parties, structured settlements provide a tax-free income stream, possibly for life.

In the event of the injured party’s death, a guaranteed (also tax-free) portion of the settlement may be made to the estate or a named beneficiary such as a spouse or child.  The payments are set at the time the settlement is created. The money used must come from the defendant or its insurer to purchase the annuity.

Non-physical (non-qualified) structured settlements are specifically designed for non-physical injury claims, such as employment disputes involving wrongful termination or discrimination. While the proceeds are taxed upon receipt (unlike personal injury structures), they offer tax advantages to the plaintiff.

The primary reason non-qualified settlements are structured is that they allow the plaintiff to defer the taxes until the annuity payments are received

State and federal solvency standards and regulations protect annuity policyholders in a number of ways. Regulators use conservative accounting and investment rules, which keep insurers from investing heavily in risky investments. Investments are typically high-quality investment-grade fixed-income securities.

Structured settlement annuities enjoy competitive returns compared to other conservative investments in addition to their tax-free status. In California, companies offering structured settlements must first be approved by the California Department of Insurance. The department evaluates the insurance carrier’s solvency and whether the carrier complies with California regulations.  The same is true for life insurance companies in the state they are domiciled.

Carriers are also subject to mandatory annual audits and other financial compliance requirements. By regulation, all annuity reserves must have assets that are equal to or exceed the corresponding payment obligations. In addition, the assets supporting these reserves may not be removed from the life insurance company.

Reserve sufficiency is mandatory and is frequently monitored by state legislators and auditors. State insurance commissioners have developed these regulations to preserve the solvency of general accounts that hold assets, ensuring that contractual obligations to policyholders are met. These general accounts support only the obligations of the insurance companies–and not the obligations of a parent company or other subsidiaries.

Market-based assets can be part of the settlement if the injured party is seeking asset growth and inflation protection. These assets are invested in mutual funds–such as those offered by Vanguard or Fidelity.

Yes. After the injured party passes away, a structured settlement can dictate that any remaining annuity sums be paid in continuing periodic payments for a specified number of years to a beneficiary or beneficiaries.

No. Once a structured settlement is ordered, it may not be altered. You may only receive money from the annuity on specified dates in the original structured settlement agreement. Money can be designated to be paid on specific dates or for future education costs, a new car, even a new home.

Yes.  Factoring companies, which also buy lottery winnings, casino jackpots and other annuity-based payouts, use television and print advertising to reach individuals with structured settlements, offering to buy the settlement annuities at deeply discounted rates and paying the individuals a lump sum.

Settlement buyouts require court approval. If the buyout is in the “best interest” of the injured party, the court approves the sale. California SB510, signed into law in 2009, provides the courts with explicit guidelines for determining whether a buyout is appropriate. Some of these guidelines include a review of the injured party’s current and future financial needs, whether the party has received independent legal and financial advice regarding the buyout, and whether the “discount rate” proposed by the factoring company is in keeping with current market rates.