The Settlement Alliance

Structured Settlements: Are They Still Worth It?

Structured Settlements: Are They Still Worth It?

Sep 16, 2014

When Congress enacted the Periodic Payment Settlement Tax Act of 1982, the Federal Tax Code was amended to allow special tax treatment for damages received in personal injury and wrongful death cases. The legislation provided that if a personal injury/wrongful death claimant wanted to invest a portion or the entirety of their recovery in a structured settlement, that money would be excludable from gross income.

Much the same, a lump sum settlement from a personal injury/wrongful death case is not taxable. However, should the claimant decide to invest that lump sum in a traditional investment vehicle, any interest earned on that investment is taxable. On the flip side, if the claimant invested the recovery in a structured settlement annuity, any interest earned on the annuity is tax-free.

In addition to the tax-free feature, structured settlement annuities can provide:

  • Guaranteed long-term income: the structure is funded by an annuity contract issued by a highly-rated insurance company
  • Protection against dissipation of the settlement: structured annuities preserve the settlement so that it’s there for the long term
  • Flexibility in plan design: plans can be designed to include periodic payments, lump sum payments, or a combination of both
  • Less time and expense than a trial: taking a claim to trial can cost considerable time and money

Tax-Free Structured Settlement Growth

Structured settlements can offer returns comparable to those of traditional fixed-income investments. As mentioned above, one of the biggest upsides to a structured settlement is the tax-free growth. In an update on the structured settlement industry, Prudential provided a table to illustrate the benefit of tax-free growth.

In order to end up with the same return as you’d get with a structured settlement, the claimant would have to invest a lump sum at a higher rate of return. For example, an individual in the 30% tax bracket who invested in a structured settlement with a 5% rate of return would have to get a 7.14% rate of return if they chose to invest the lump sum instead. The reason? The lump sum would need to earn more to cover the taxes and fees associated with traditional investments. The structured settlement allows the claimant to invest at a guaranteed rate of return without all of the overhead costs.

Are They Worth It?

Yes, structured settlements are still worth it. Regardless of the interest rates, structures do what they were meant to do—they preserve the settlement recovery for the long-term.

We are proud to partner with the highest rated structured settlement providers in the industry:

  • American general Life Companies
  • Berkshire Hathaway Structured Settlements
  • Liberty Life Assurance Company of Boston
  • MetLife
  • Mutual of Omaha
  • New York Life
  • Pacific Life
  • Prudential