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How to Calculate Structured Settlements

Structured settlements are annuities paid to an individual over the course of time. Such settlements often occur in cases of personal injury. For example, an insurance company agrees to pay a plaintiff $300,000 over the course of 25 years. This means the plaintiff will receive $1000 a month once the structured settlement begins to pay out. However, the plaintiff may choose to liquidate his or her structured settlement in a lump sum, either to pay off an immediate debt, buy a home or car or take care of any other pressing expenses. Doing this requires determining the time value of money. The time value of money takes into account two factors. First, inflation devalues money, so money today is worth less than money tomorrow. Second, money today can be invested and grow, while money promised cannot gain in value.

Determine the current remaining value to be paid. If the structured settlement has not begun to pay out, this amount will be the total amount of the settlement. However, if you have begun to receive payments, calculate the remainder. For example, if you have been receiving $1000 per month for 5 years on a $300,000 settlement, the current balance of the structured settlement is $240,000.

How to Buy a Structured Settlement

A structured settlement is when a legal payment is structured in installments rather than a lump sum. The payee can purchase annuities with guaranteed future payments to cover the installments. While there is a theoretical value to these installments--which can be determined using a present value of an annuity calculator--the actual value of a structured settlement can differ substantially based on several key factors.

Contact a structured settlement broker to help locate sellers and negotiate the deal. The National Structured Settlements Trade Association (NSSTA) has more than 600 licensed insurance brokers, insurance companies and others in the business of administering structured settlements. Each member of the NSSTA must agree to a code of ethics before the application is accepted. Use the NSSTA to help locate an independent attorney who will represent your interests well, both legally and ethically.

Structured Settlements vs. Lump Sum Settlements

When you sue another party in court, and there is a good chance that you will win the case, the sued party may offer to make a cash payment to you and close the case. Such payments are referred to as settlements. You will usually have the choice to receive either a one-time payment, known as a lump sum, or annual payments every year for a specific number of years, which is known as a structured settlement.

Immediate vs Spread-Out Payments

A lump-sum settlement payment is superior if you have an immediate need for cash. If, for example, you have a significant sum of credit card debt, the lump-sum payment can be very valuable in helping pay off outstanding loans and avoid bankruptcy. A structured payment, on the other hand, will provide security for years to come. Since the payer also avoids an immediate cash drain, the total payments you will receive in a structured settlement will be more than what you will be offered as a lump sum. And settlements in some lawsuits, such as personal injury suits, are tax-free, making a structured settlement a good deal, because it provides years of tax-free income. If you invest a lump-sum settlement payment, gains are taxable.

What Is a Structured Settlement?

A structured settlement is an arrangement in which payments are made over time after a judgment in a lawsuit or an insurance claim. Some settlements include a portion of the payout up-front, with the remaining balance "structured" into monthly, bi-annual or annual payments.

History

Structured settlements were created in the mid-1970s after the Internal Revenue Code allowed defendants to purchase annuities in order to fund financial obligation. The annuities paid out over a period of time, paying the defendant's judgment. These structured payment plans were devised for "large catastrophic injury cases," according to RinglerAssociates.com, but now they are just as likely to be used for small-scale cases, with some even under $50,000.

Dividing a Variable Annuity in a Divorce Settlement

Divorce settlements can be both simple and complex arrangements, depending on the distinct circumstances of the relationship. Financial matters to be resolved in a settlement may include the division of investments and savings. A variable annuity, one type of investment product, can be divided several ways as part of a divorce settlement. However, taxes need to be considered when dividing a variable annuity to make the best arrangement for both parties.

Qualified Domestic Relations Order

According to SmartMoney, dividing financial assets, such as those within a variable annuity contract, should only be done in a divorce settlement with a proper qualified domestic relations order. The Internal Revenue Service defines a QDRO, in part, as a legal order pertaining to the payment of marital property rights.

Can Creditors Garnish Injury Settlements?

Garnisment is when creditors file suit against a debtor and get a court order to take away the debtor's wages or property. If an injury victim falls behind on debts and the creditors make claim, it is possible that his settlement money will be subject to garnishment. Debtors facing the loss of a settlement to creditors need to know their state laws and how to protect their assets.

Injury Settlements and Debts

When a person falls behind on his payment towards his debts, creditors have the legal right to sue to collect monies owed. Oftentimes, filing suit against the debtor results in the creditor garnishing wages or claiming rights to the debtor's assets. While certain types of pay like unemployment or child support are protected from garnishment by federal law, injury settlements are not.

What is the Definition of Structured Settlements?

It may seem counterintuitive, but it's actually not that rare for individuals who win large court settlements or the lottery to end up bankrupt a few years later. This is usually because these individuals are not keen on money management and fritter away their awards without establishing a long term income plan. Courts in the 1970s began regularly offering cash settlements in structured formats as an alternative.

Features

A structured settlement is the opposite of a lump sum payment. It breaks up the total award into regular payments over a long period of time. In most cases, the structured settlement works like an annuity, providing a fixed income amount for the lifetime of the payee or for some prearranged duration. The party obliged to pay usually purchases an annuity, the income of which offsets their obligation, or transfers the debt to a third party who engages in a similar arrangement.

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