A structured settlement company, structured settlement broker or a personal injury lawyer in your local jurisdiction will be able to give you more information.
Of.... tort damages, personal injury claims, personal injury compensation and periodic payments.
Disadvantages of Structured Settlements
Structured settlements are not perfect and in comparison to lump sum payments, there are some quite nasty disadvantages of which the personal injury claimant (more properly called the plaintiff) should be aware.
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A Promissory Note instead of an Award?
If you are awarded a structured settlement, you are getting a promise to pay in the future instead of a lump sum payment to use as you see fit. This is the case whether the defendant purchases an annuity from an insurance company, or whether they bind themselves to pay in the future according to the schedule agreed, as might happen with a public body such as an arm of Government. Clearly, there must be some level of risk to the beneficiary attached to a promise to pay, however much it as bound about by the law. Probably the greatest of these risks is insolvency of the obligor (see below).
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A Settlement Carved in Stone?
Once set up, the structure cannot be modified. As it is not possible to alter the terms of a structured settlement once it has been granted, some come to look upon it as a kind of straight jacket that restricts their freedom. Although step increases may be paid to fund anticipated events that bring increased costs to the recipient, not all such events can be anticipated. A completely unforeseen change of circumstances occurring after the time of the settlement could easily cause financial hardship. A lump sum, on the other hand, if invested in highly marketable stocks or bonds, allows the option of selling part of the portfolio at any time to meet unexpected contingencies.
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Risk from Inaccurate Financial Assumptions
Whilst inflation is normally factored into to the overall size and payment schedule of a structured settlement, the costs of medical care may rise more steeply than the general inflation rate and indeed this has occurred in the past. This could eventually leave the recipient short of funding. The design of a structured settlement will always attempt to predict and factor in future costs that the claimant will face but in this it may not be entirely accurate.
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Premature Death
Should the recipient of a structured settlement die younger than expected and if the settlement did not specify a guaranteed period of payment, then the obligor (usually an insurance company) is entitled to keep the remaining value of the settlement. This risk is part of the price of having a guaranteed income into the future, but is actually more a concern for the heirs of the recipient's estate than for the recipient. However, steps can be taken to prevent too large a windfall going to the insurer. The settlement may specify that in the case of premature death the insurer must pay a fixed portion of the settlement to the recipient's estate. Alternatively, insisting on a guaranteed period of payment would serve to protect any heirs and stop the obligor gaining most of the value of the annuity. Such a period could be almost any length deemed appropriate; perhaps as long as 30 years. Using one of these methods, this 'disadvantage' of structured settlements can be turned to the advantage of the beneficiary. Be sure to discuss this with your lawyer if a structured damages settlement is a distinct possibility and if you have worries about the financial wellbeing of your heirs. They will be able to tell you exactly what is or is not allowed in your jurisdiction.
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Low Investment Return from Annuities
It is not difficult to get considerably better returns from investing a lump sum than can ever be gained from the annuities that fund a structured settlement. Moreover, this can be achieved using normal investment products; it is not necessary to undertake inordinate risks. Those that have knowledge of the investment market might therefore prefer to take a lump sum settlement. However, it should not be forgotten that the returns on lump sum investments are normally taxable.
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Insolvency of the Obligor
Here's one they don't like to tell you about. If you accept a structured settlement annuity, then ultimately it is you who will take the risk that the insurance company or other entity responsible for making the periodic payments (the obligor) stays solvent for the duration of the settlement, which may mean for the duration of your life. Once funding has been approved by a court, the defendant is discharged and the obligation to pay passes to the insurance provider. Whilst it may be broadly true that only very highly rated life insurance companies backed by very large assets are used to fund structured settlements, insolvency is not as small a risk as the insurance industry would have you believe. Hidden or unquantifiable dangers lurk in the market place, in the re-insurance merry-go-round that pauperised many of the backers (sorry, 'Names') of Lloyds of London, and now, seemingly, in climate change, whatever its cause. Natural disasters can weaken the strongest insurer or re-insurer. Given the apparently increasing instability of weather patterns in recent years, such events are likely to become more frequent than hitherto. Should they arrive in quick succession, then the insurance industry as a whole could have difficulty in meeting its obligations. To spread any given risk as broadly as possible, insurance companies re-insure each other. This works well enough under 'normal' conditions, provided that the risk really is spread broadly, as opposed to appearing to be spread broadly. But should the unthinkable happen (i.e. an extended chain of destructive events affecting large and affluent cities) then insurance funds will be drained on a global scale. Re-insurance can be compared to a game of 'pass-the-parcel'. If insurance companies are affected by disastrous events worldwide then even the largest can find themselves with far more liability in their hands than they reckoned to carry. Unfortunately re-insurance at a global scale is ultimately circular. If insolvency does occur and your annuity provider defaults on your payments there will be little you can do about it. Much will depend upon where you live. In some jurisdictions, insurance companies that are authorised to fund structured settlements are obliged to pay into a centrally-administered fund, the purpose of which is to cover the obligations of any member who defaults because of insolvency. The size of that fund will likewise depend on the stipulations of your local law. It may be that the obligation to fund your settlement can in fact be passed from the defendant or the defendant's insurers to a third party by means of a "Qualified Assignment". However, the buck has to stop somewhere in all this and there just has to be some element of risk to the annuitant. If we really are facing climate change, then any safety net might be overwhelmed, including governments and banks. Such a scenario would make a lump sum converted to buried gold coins look attractive! Anyone who doubts that the largest life insurers can hit serious trouble is referred to the recent history of Equitable Life, the oldest insurance company in the world and always regarded as the ultimate rock-solid company. In this case, it took neither market risk nor natural disaster to bring about crisis; just plain bad management (alleged, gentlemen, alleged). This was compounded, it seems, by equally bad regulation.