Structured Settlements 101
By Adam Short, Thu Dec 8th

You have probably heard the term "Structured Settlement" on atelevision or print ad and wondered what it meant. After all,the term is not a part of our everyday lexicon.

A structured settlement is a contract under which an insurancecompany undertakes to make periodic payments to an injured partyas part of a bodily injury claim settlement or to a survivingfamily member to whom a large settlement has been awarded. Theseare just two examples of where a structured settlement might beused. Structured settlements have become popular because theyoffer substantial benefits to all parties involved in thesettlement agreement.

A brief review of the dictionary reveals the followingdefinition: a structured settlement is simply a financialpackage that permits a settlement to be paid in regular paymentinstallments for either a set period of time or over a lifetime.In short, a structured settlement is a package that is tailormade for the individual or payee by the payer or an interestedthird-party. Some structures include immediate payment to coverany special damages that may have occurred or will occur.

The system of structured settlements was first introduced inCanada in the early 1970's and spread into the United Statesvery quickly. Within a few years, the idea had found its way tomany countries including Australia and most member states of theEuropean Union.

Benefits of a Structured Settlement

A structured settlement annuity provides a payment stream thatis tax-free over a determined period of time. Most investmentoptions such as stocks and bonds, real estate, savings accounts,and similar vehicles simply cannot match the flexibility andsecurity of a Structured Settlement Annuity.

Another benefit of a structured settlement annuity is that itcan be designed so that payments are made over an extendedperiod of time, even throughout the life of the payee. In theevent of the recipient's death, a guaranteed portion of thesettlement may be paid to the person's estate or to a namedbeneficiary. Structured Settlements have become quite common andoffer the additional security of regulation by both Federal andState statutes. There are also provisions in IRS andMedicare/Medicaid guidelines which take them into account.

Alternatives to Structured Settlements

It's quite easy to see that a structured settlement can work tothe advantage of all parties in a variety of circumstances.However, there are occasions when the beneficiary of astructured settlement would prefer not to have periodicpayments, preferring instead a lump sum payment. Such might bethe case where an individual would like an amount of money topurchase a home, perhaps to cover large medical bills or to payoff a mortgage. This option has also proved especially popularwith lottery winners. There are a number of insurance companiesand others that provide this service for a fee. In suchinstances the insurance company or another interestedthird-party makes the lump sum payment with a charge forexpenses and interest deducted. It is important to considerthese fees and read the fine print carefully to be sure that youare not signing away the bulk of your payment. How do thealternatives work?

The settlement contract is sold to a financial institution whichthen accepts the periodic payments from the payer and gives thebeneficiary a lump sum. Commonly, the financial institutioninvolved will be another major insurance company. The insurancecompany charges a handling fee which will usually be calculatedto take into account adjustments for interest charges andhandling costs. Again, if you are considering taking this optionyou must bear in mind that the company buying the payments for acash sum is in business to make money. The amount of the one-offpayment will certainly be considerably less than the grossamount that would have been received over the original extendedperiod. Unless the amount of the lump sum is very substantialand the recipient can be sure of consistent investment income,it's almost certainly going to be better to stick with theoriginal arrangements. An exception might be where the recipientis a younger person in good health with a substantialexpectation of gainful employment for the long term.

Again, as with any contracts be sure to read and understand theterms of the agreement you are making. Make a list of questionsand ask until you understand. It is also a good idea to cast awide net when looking for an alternative to structuredsettlements as fees and services; and thus your bottom line canvary greatly.

About the author:Adam Short is freelance writer and creator ofhttp://www.structuredsettlementinfo.info - a site providing thelatest news and information on structured settlements.