How a structured settlement works in injury cases
It’s been said that compound interest is the Eighth Wonder of the World. In the world of personal injury settlements — where money is the only thing — this old maxim by Albert Einstein rings especially true.
Thankfully, most people who bring an injury claim have recovered from their injuries, have resumed their normal lives and a one-time lump sum payment does just fine, thank you very much. But there are two instances where a one-time payment is often not advisable. First, when minors are involved, and second, when there has been a catastrophic life-changing injury and an unusually large settlement is being paid.
As to the first scenario, where minor children are involved, no one believes it wise to drop a six-figure settlement, or even a significant five-figure settlement, into the lap of a 16-year-old. For this reason, minors under the age of 18 are still viewed as “wards of the court,” and, therefore, the settlement of any injury claim involving a minor must be approved in court before a judge. The money does not get paid to the parents. The law is fearful the parents may spend the money for their own needs when the money is intended for the child to compensate for the child’s pain, suffering, inconvenience and whatever else he or she experienced as a result of being injured.
With this in mind, the law in Virginia leaves two options for minors: (1) pay the settlement money into the clerk’s office and the child can come in and get it at age 18, or (2) the better option — buy a structured settlement which will allow the money to grow, tax-free, and have the money paid out at different intervals after the child turns 18. The typical pay-out schedule is during the college years, between the ages of 18 and 22.
The second situation, where a structured settlement is appropriate, occurs when there is a large settlement, typically into the seven or eight-figures, and the victim has been horribly injured and requires lifetime medical care. In either case — for the child or the terribly injured adult — the structured settlement provides an income stream for that person later in life.
The settlement money is used to buy a “structure,” or an annuity, which is conservatively invested and the money is guaranteed to be paid out in definitive amounts that are disclosed on a payment schedule at different intervals of time. In the case of a catastrophically injured person, a structure may be set up to pay a certain amount monthly, or quarterly throughout the year.
The beauty of a structured settlement is that the money is invested, and it grows tax-free. Personal injury settlements are one of the few areas of life the I.R.S. has kept its hands off. And, just to assuage any jitters about market volatility, these structured settlements are invested in secure products, often with lower returns as opposed to the S&P 500 or the NASDAQ. In other words, you aren’t gambling in the market. For children, the Virginia Code actually dictates that the payments “shall be made or irrevocably guaranteed” by an insurance company rated “A plus” (A+) or better by Best’s Insurance Reports. This ensures the money isn’t being invested in a speculative investment like a start-up company or cryptocurrency.
But, beware: there are companies out there that make a large profit in actually purchasing the structured settlements of injured people. These are the companies you see on commercials during daytime television. They advertise during daytime T.V. shows because it is those people who are at home, no longer working, watching daytime programs. They offer to buy a person’s injury settlement, and in exchange make a lump sum payment. They tend to prey on the buyer’s regret sentiment of “it’s my money” and “I want cash now.” And, so, there might be a personal injury settlement of $3 million with the victim receiving monthly amounts for the rest of his or her life. Along comes this company offering to buy the structure and pay the victim, say, $325,000 now. Again, this all centers around the time-value of money.
My advice: if the settlement is attractive enough for that company to want to buy it, it should be attractive enough for the injured person to keep it. You’ve already been a victim once, don’t be a victim again by selling your settlement to a profiteer.
