In 1982, the U.S. Congress passed the Periodic Payment Settlement Act. This piece of legislation was designed to protect a plaintiff from depleting their cash sum award from a personal injury or wrongful death lawsuit too quickly. It was also meant to prevent the plaintiff from going on public assistance because they spent all their money from the award. The Periodic Payment Settlement Act helped to establish a stream of income for a specified time or the life of the plaintiff. This legislation changed the tax code by making these payments tax-free under most circumstances.
Before 1982, a court settlement was typically paid in one lump sum. A claimant would often spend all the money, yet they were still injured and could not work. They would often have to go on public assistance until they were able to go back to work.
At some point during the 1970s, insurance companies saw an opportunity to set up structured settlement payments to individuals who won large cash payouts from their lawsuits. They argued that lump-sum settlements are tax-exempt, so structured settlements should also be tax-exempt. Insurance companies used annuities as a vehicle to set up structured settlement payments.
How does it work?
When a plaintiff wins or settles a lawsuit against a defendant, a licensed structured settlement consultant will work with the plaintiff to purchase an annuity from a life insurance company. The consultant and plaintiff need to choose a highly-rated life insurance company because that company will be managing the annuity. The plaintiff can negotiate the terms of the payments such as:
- When the payments begin
- The frequency of the payments
- The dollar amount of the payments
- The length of the term of the payments
What is an annuity?
An annuity is an insurance product that is often used by retirees who need a steady source of cash flow during retirement. An annuity can be funded with periodic payments or with one lump sum of money. There are different types of annuities, which include immediate pay fixed or variable income annuities and deferred pay fixed or variable income annuities. The plaintiff will need to decide which type of annuity is best for their situation.
Types of cases that result in structured settlements
Many types of lawsuits can result in a lump sum cash payment. Court cases that typically result in structured settlements include:
- Personal injury cases – A person can file a lawsuit for injuries they believed were caused by another person or business. A structured settlement can help pay for medical costs and lost wages.
- Medical malpractice – An injured patient or the family of a deceased patient can sue if they believe they were harmed by a doctor.
- Workers’ compensation – This is a type of structured settlement that provides compensation to an employee who is unable to work due to a workplace injury. It pays for medical costs and lost wages.
- Wrongful death – When a family claims that their loved one is a victim of wrongful death, they can seek compensation to replace the income of their loved one.