A structured settlement is an annuity that meters out payments to you over time. Why do this? Because it guaranteed monthly payments and prevents a person from spending through a lump sum of money.
In most personal injury cases, it’s required by the insurance company or the court. It used to be that settlements were paid in lump sums. However, most people ended up spending all of the money on things other than expenses related to the original reason for the lawsuit. Today, courts typically order a structured settlement to preserve funds for the recipient.
For retirement, many seniors choose a settlement option that includes lifetime payments because it makes it easier to budget for the long-term and the retiree is guaranteed never to run out of retirement income.
How To Buy One
Buying a structured settlement is easy. Basically, all you have to do is contact an insurance company. The insurer will take your lump sum of money, calculate an interest factor, and then divide the payments out for you over a set number of years.
In most cases, the insurer will help you decide which type of annuity is best for you given your individual circumstances. Settlement options range from just 5 years to an entire lifetime. By taking lifetime payments, you will receive a lower “per month” payment than if you had chosen something called a “period certain” annuity – a settlement option that continues for a specific number of years.
Once the insurer has converted your savings into payments, it can almost never be undone. There’s one exception, of course. Third-party liquidation companies provide an “exit strategy” should you change your mind in the future. Selling a structured settlement is dangerous, because you’re accepting a lower dollar amount than the total value of your future annuity payment.
To make it a good deal, you must be absolutely certain you can manage a lump sum of money on your own.
For example, if you have a settlement with a total future value of $1 million, the liquidation company will only give you fraction of that sum. If you’re lucky, you’ll get $500,000. In many cases, you’ll get less.
Benefits
The benefits of a structured settlement are almost endless. For starters, most people choose a structured settlement option because they don’t want to worry about investing over the long-term. If you’re not good with investments or managing money, an annuity is probably a good option for you.
It takes a lot of the guesswork out of budgeting for income in your advanced age. Structured settlements also reduce the total amount of savings needed to generate a specific income. For example, if you wanted to guarantee yourself $50,000 per year, and you could secure a guaranteed 5 percent interest rate over your entire life, you’d need $1 million in savings.
On the other hand, with a structured settlement, you’d need far less – only $600,000. Sometimes less than that depending on the annuity interest rate. How is this possible? Because structured settlement payments consist of mostly a return of principal and a small amount of interest.
The “magic” is in the way the insurance company spreads out risk. Because the insurer covers millions of other policyholders, it can guarantee you a payment forever (if you choose a lifetime payment option). Even if you would have otherwise run out of money, the insurer still pays until you die.
Melissa Rudd is a retired legal advisor and notary public of many years. When she’s not out photographing nature, she is blogging about all things legalese.