Structured settlement is generally known as the replacement for the conventional lump sum cash settlement. In brief, a structured settlement is a contracted arrangement where the insurance company agrees to pay a predetermined periodic payment to the claimant. Most of the time, such payment is used to resolve personal injury tort claims or to compromise a statutory periodic payment obligation.
Structured settlement system was first introduced in Canada back in 1970s, followed by United States in the early 80s and then to the European countries. As the system is recommended by the Federals, structured settlement is a popular alternative to the lump sum cash settlement in United States.
Advantages of structured settlement system
In United States, favorable tax treatment rules have been extended to the cash received under annuity payment agreement in order to encourage the use of structured settlement system. For instant, money income from structured settlement payment are not included in gross income when filing tax, this means that the payment from structured settlement is non-taxable.
With the money made with tax free dollars while maintaining a tax write-off, the annuity payments from a structured settlement system provide a steady cash flow to start a business or securing home mortgage installments.
Avoid dissipation risks
Besides, the structured system offers a perfect income stream where dissipation risks are minimized. It is very common for a lump sum settlement recipient to finish all the money in a short time as the money is like lottery winning. Most of these lump sum money are wasted in ineffective investment or unrealistic luxurious instead of securing life long income stream.
At the end of the day, some of the former recipients might have found themselves with no cash flow, relying on loans for family living expenses, or even relying on direct public assistance as a source of support for the rest of their life.
The payment stream in a structured settlement payment has no limitation at all. Depends on the arrangement between beneficiary and the insurance company, payment stream can be made the same each year, or increase annually; the payment period can be fixed at a certain length of time, or it can be set as lifetime basis. Besides, the structure settlement can be sold for instant cash as well during necessary. Selling a structured settlement provides the convenience in case that you need some instant cash to overcome major expenses in life such as buying a house or returning a loan.