Structured Settlements Laws

Definition: When a plaintiff gets a judgment in his favor, he is entitled to a huge amount of money as compensation and damages. In such cases, the defendant agrees to pay the imposed amount in installments over a period of time as against a lump sum. Settlements paid in this manner are called structured settlements, and the law – structured settlement law.

Structured settlements law in the United States:

1. Laws and regulations pertaining to structured settlements have been enacted in the United States at federal and state levels. They are described by the Internal Revenue Code and the National Conference of Insurance Legislations. According to the legal structure, a structured settlement consists of :

  • The claimant
  • The defendant
  • Periodic payments by the defendant or the insurer

2. It is usually the insurer who funds this obligation to the defendant. There are 2 approaches to this funding:

  • The defendant purchases an annuity policy from an insurance company.
  • The defendant delegates the periodic payment obligation to another party that purchases a qualified funding asset to fulfill the obligation.

Advantages of structured settlements

  • They help in avoiding tax. It reduces the plaintiff’s tax liabilities that result due to the settlement.
  • Distribution of the compensation over a period of time helps maintain the fund intact and use it for the intended purpose.

Disadvantages of structured settlements

  • Periodic payments may block the plaintiff from making any big investment like purchasing a home or setting up a business.
  • Sometimes investing the lump sum through standard investments may yield better returns than the small periodic sums that make it difficult to enter into such arrangements.
  • Some insurance companies are known to approach the parties for buying their settlement. This is a bad profit that benefits the company more than anyone else. So many states have laws that restrict the sale of settlements.

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