The Settlement Alliance

Why Structuring SMALL Settlements Can Mean BIG Benefits: Case Examples

Why Structuring SMALL Settlements Can Mean BIG Benefits: Case Examples

Feb 23, 2018

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It is understood that structured settlements are a safe financial vehicle widely used for injury victims receiving large settlements. As settlement planners, we are frequently asked if it is also appropriate to structure smaller settlements. The truth is, our team works with injury victims regardless of their settlement size, and in fact, the average structured settlement is much smaller than you may think. Don’t let the size of the settlement cost your clients the opportunity to evaluate the benefits of a structured settlement annuity. Keep reading for some recent statistics and actual case examples demonstrating how structured settlement annuities can benefit recipients of smaller settlements.

What is the Average Case Size for Structured Settlements?

A claimant need not have a million dollars in settlement proceeds to reap all the benefits a structured settlement provides. In 2017, Pacific Life reported an average case size of $166,000, Mutual of Omaha reported $135,650, and American General reported $176,964. The minimum amount required to fund a structured settlement varies by life company, and most will structure as little as $10,000.

Why structure a smaller settlement?

The benefits a structured settlement provides are the same, whether a claimant structures $30,000 or $1,000,000:

  • Preferential tax treatment: Both the money used to purchase the annuity and any growth on the funds is 100% income tax-free. This includes federal and state taxes.
  • Flexible design: Future periodic payments can be paid out monthly, semi-annually, annually, or in a series of lump sums. They can also be deferred.
  • No management fees: Unlike traditional investments and trusts, which can incur trading costs, commissions and account fees, structured settlements do not have any management fees.
  • Guaranteed return: A structured settlement’s rate of return is guaranteed1 at lock-in, making it impermeable to downturns in the market.
  • No contribution limits on retirement: Combining the powers of a structured settlement to complement a 401(k) can supersize a retirement plan. Unlike traditional retirement plans such as 401(k)s and IRAs, structured settlements have no contribution limits nor taxation on distributions.
  • Preservation of needs-based government benefits: When used in conjunction with a special needs trust, structured settlements can ensure the corpus of the trust will remain in good health and protect eligibility for government benefits like SSI and Medicaid.
  • Protection: Structured settlements offer protection against family, friends and even the claimants themselves. All too often, recipients of cash settlements become the target of others’ financial pursuits. Challenges with bankruptcy, divorce or other proceedings? Safeguarding the settlement with a structure can provide peace of mind that the claimant’s settlement is protected from being claimed by other individuals.
  • Preservation of college aid eligibility: Minors who have received settlement proceeds and are nearing college age may run into issues when applying for aid. A lump sum cash settlement could count against a student’s eligibility for aid, leaving their family burdened with how to pay for college. By placing funds in a structured settlement, the minor may have more options when it comes to financing a college education.

Case Examples

The following case examples illustrate structured settlement proposals2 for two different claimants, each with a relatively small settlement:

Case #1: Lifetime Annuity Deferred Until Retirement

Edwin is a 50-year-old plaintiff who received a $250,000 net settlement after suffering a leg injury in a slip-and-fall accident. After a review of his financial goals, Edwin was advised by a settlement planner to use $150,000 to pay off the balance of his mortgage. He planned to continue working and did not need the remaining $100,000 of his settlement right away. After evaluating his options, he elected to structure the $100,000 balance and defer distribution of the payments until age 65 for the remainder of his life. At 65 he will begin receiving lifetime monthly payments from his structure to complement his 401(k).

Edwin is guaranteed to receive at least $151,200 in total payments and is expected to receive a total distribution of $219,000 should he live his full life expectancy. The upside is that he will continue receiving a monthly benefit as long as he lives. Unlike his 401(k), his structure payments are guaranteed and will remain 100% income tax-free.

*Expected payments are estimated payments that will be made over the claimant’s life expectancy as computed by the life company, or that will be made over the guarantee period if no life contingent benefits are quoted. Lifetime payments will continue until the death of the claimant, only if life contingent benefits are quoted.

Case #2: Major Purchase

Austin is a 21-year-old plaintiff who suffered a minor injury and is expected to make a full recovery. After attorney fees, Austin’s expected net recovery is $65,000. Austin had never been in possession of this amount of money and was struggling with how he should invest a portion of it. The more research he did, the more stressed he became. Understanding that this was a big decision for his client, Austin’s attorney brought in one of our settlement planners to educate Austin on his options so he could make an informed decision. Austin’s primary goal was to clean up small debt and put himself in position to purchase a home in his mid-thirties. After careful review, Austin elected to take $15,000 in cash to pay off light credit card debt, purchase a reliable automobile, and set aside $5,000 in the bank as an emergency fund. He elected to structure the remaining $45,000 and defer payment until age 35. Beginning on his 35th birthday, Austin will receive semi-annual payments of $33,465 for a total guaranteed, tax-free benefit of $66,930.

Austin was very happy to utilize a safe and secure option that protected his settlement and grew to $66,930. He intends to use the first structure payment for a down payment on a home and the second one to help furnish his house.

*Expected payments are estimated payments that will be made over the claimant’s life expectancy as computed by the life company, or that will be made over the guarantee period if no life contingent benefits are quoted. Lifetime payments will continue until the death of the claimant, only if life contingent benefits are quoted.

Contact The Settlement Alliance with your next injury case

Interested in learning more? The Settlement Alliance has helped thousands of claimants create structured settlement plans to meet their needs. Contact us today at 800-464-2500 or info@settlement-alliance.com.

1 Guarantees are subject to the claims-paying abilities of the issuing insurance company.

2 Structured settlement quotes are for illustrative purposes only and subject to life company approval.

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

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