Structured Settlements The Basics

When a person suffers a serious personal injury they often find themselves in very difficult economic situations. Often they are not able to work for several weeks, or months and sometimes even years. Occasionally they are not able to return to work at all. To add insult to injury insurance companies and claims adjusters often take a very negative attitude to anyone making some sort of claim.

These personal injury victims knows they did nothing and wrong and expect these insurance companies that live up to their promises. Personal injury victims really expect them to act as in their advertisements, to take care of them and lend a helping hand. Most people seem to forget that insurance companies and businesses are in it for the money and no other reason. Even non-profits are primarily motivated by money. The personal injury claimant sometimes gives up the claim, sometimes they get strung a long until the statute of limitations runs out, some times they are quickly disenchanted and call a personal injury attorney.

What happens about half the time is personal injury victims seek legal help from a personal injury attorney and a few months later find themselves a party to a lawsuit. In some situations the matter is resolved in under a year, but for others it may take 18 months to 2 years or even more. Most cases are resolved without a trial during negotiations or some sort of procedure where a third party is involved to help resolve the problem.

In these serious injury cases the personal injury victim is presented with what is called a structured settlement. A structured settlement muddles up things for the personal injury victim, because the personal injury victim is presented with new concepts, which some persons have never heard off. This concept is called the present value of money. Essentially the personal injury victim is presented with a settlement that would involve a stream of income over several years. There may be monthly payments, annual payments, or a combination of the two. The total number of payments sometimes seems very high, but it is really not that great once other factors are taken into consideration.

The true value of the proposed settlement has to be computed on the basis of today’s money. This is computed by looking at an interest rate, the amount of the payments and how often the payments are made. A simply plan would be equal payments every month over a 30 year period at a specific rate. If the rate happens to be 6% paid out in equal payments over 30 years, then you essentially have a typical home mortgage, but with the personal injury victim making the loan to the defendant. Those of you that have seen your loan documents will see there is a huge difference between the amount of your loan and the total repayment amount. These are the principals of a structured settlement. The value of the settlement has to be computed by looking at the present value of the settlement not the total payout. Some personal injury attorneys have difficulty understanding these concepts and therefore have difficulty explaining this to their clients.

Essentially the value of a structured settlement is based on time and rates. The sooner the personal injury

victim is compensated the greater the value of the settlement. To muddle this, there is also uncle Sam’s role.

Personal injury compensation is not taxable as it is intended to make the person whole.

If the personal injury victim receives a single lump settlement, the personal injury victim will not pay taxes on the settlement received, but any returns on investments are taxable to the personal injury victim . If the personal injury victim is compensated $1 million dollars and if the rate of return is 6% per year on $1 million, then the personal injury victim would be $60,000 per year, so the personal injury victim would be taxed on the $60,000.

In a structured settlement the proceeds received, including interest, are part of the same settlement and the net return to the personal injury victim are usually greater. If the personal injury victim receives $60,000 per year as part of the structured settlement there are no taxes. Unless the personal injury victim can substantially beat the rate of return from the structured settlement the personal injury victim is better off accepting a structured settlement. Occasionally the rate of return for a structured settlement is ridiculously low. If the rate of return is 3% and the going rate for certificate of deposits and long term treasury notes is 5%, the personal injury victim may be better off taking a lump sum payment. If the tax rate is 15% based on any returns then the rate of return would be 85% of the 5% or .85 x 5% and the net would be 4.25%.

These are the basic concepts of a structured settlement, there are complicated formulas to make computations, but these same formulas are also readily available on popular spreadsheets.