You may have heard the term structured settlement annuities in the news but the average person more than likely doesn’t know what they are. Simply put structured settlement annuities are insurance policies that provide fixed payments over a period of time to a plaintiff in a lawsuit. This type of insurance is usually purchased by the losing side and payments can be scheduled to range over a period, and sometimes even for as long as a person’s lifetime. Without such insurance, the loosing side could have an inordinate amount of expenses to pay out to the plaintiff.
This settlement type is more commonly used to settle personal injury cases. It is a well-known fact that every year, a large number of North Americans will be injured in industrial accidents, product liability accidents or even car crashes. In cases with major injuries that result in long term loss of wages due to prolonged medical treatments, settlement is usually structured over a pre-determined period of time. This is done to provide the injured party with an assured source of income as well as take into account, their possible future needs, many of which may be related to medical costs as a result of their injury.
Structured settlement annuities are very attractive simply because they are tax-free as income received from this type of settlement is considered not legally taxable. In summary, they are basically a court directed financial compensation package paid in installments over the life time of a person or for a predetermined number of years.
In Canada and the United States, this type of Settlement Annuity was first used as an alternative to lump sum settlements in the seventies. Today, they have become part of the statutory tort law of countries like England and Australia. When incorporated into a trial judgment, these settlements are called periodic payment judgments and have become quite common.
A typical settlement is usually crafted in the following way: the plaintiff (who is usually the injured party) settles or is awarded settlement by a court of law in a suit against the defendant. In the case of a mutually agreed upon settlement, the agreement would usually stipulate that in exchange for the dismissal of the lawsuit, the defendant or his insurer agree to a number of periodic payments over a pre-determined period of time. With this kind of long-term financial commitment to the plaintiff, The defendant, or his insurer will at this time either opt to purchase an annuity from an insurance company or pass on this obligation to a third party who may in turn choose to purchase what is known as a “qualified funding asset” to fulfill this payment obligation to the plaintiff. There are a number of documents required for the conclusion of this type of settlement, most notable being an annuity application agreement, a court order will be required in the event that a claim is made by a minor.
A disadvantage of this settlement type is that with the fixed payments,it becomes impossible for the recipient of the settlement to make an expensive purchase requiring a lump sum like buying a house.
