Sunday, July 26, 2009

About Structured Settlements

The Periodic Payment Settlement Act of 1982, passed by Congress, amended the Federal tax code to recognize and encourage the use of structured settlements as a payment solution in personal injury cases.

Prior to this, damages paid due to lawsuits stemming from accident, injury, or workmen’s compensation cases were generally paid as a lump sum; the injured party received all of their payment at one time. This required that the injured party not only adjust to living with a disability, but also to adjust to having a large sum of money.

Even if you do not have a crippling injury, it can be a burden to suddenly be presented with a large sum of cash. The money must be invested, and invested wisely. If you cannot or will not administer the sum yourself, then you must find someone to do it for you. A friend? A relative? A stranger? Can you find someone honest to make this money work for you? Often, these situations did not work out well, and many victims of personal injury or accident found themselves penniless after just a few years, when their settlement was intended to support them for life.

The structured settlement came about as a result of too many people being awarded large sums, only to find themselves poor and unable to take care of themselves as a result of careless spending, unscrupulous investors or greedy relatives.

In a case involving physical injury and a suit involving a responsible party, an annuity system may be negotiated as an alternative to a lump sum payout for taking care of the victim’s long-term needs. The responsible parties will meet to discuss what the victim needs in terms of care or assistance, and to determine the length of time, anywhere from a year or more to life, that the victim will need financial assistance. Once a present-day value is determined, a or a representative of the insurance company that will facilitate the payments will perform the necessary calculations to determine the long-term value of the payments. The party that pays the damages will then purchase an annuity to fund the agreement. From this annuity, the injured party will receive their stream of payments.

Some types of injuries are well-suited to long term payment plans; others work better with a lump sum payout. Annuity plans are ideal for situations where the injured party will be incapacitated for several years or perhaps their lifetime, or when they will require long-term medical care. Such a financial arrangement might have worked well for Terry Schiavo. Mrs. Schiavo, a resident of Florida, was in a hospice and unable to care for herself for fifteen years. She received a lump sum payment for the negligence that led to her persistive vegetative state, but a structured settlement might have provided a better solution. Structured settlements are particularly useful in cases where the guardians or parents of minor children are injured or killed, leaving the children without adequate financial support or funds for their education.

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