How Does A Structured Settlement Work?

Feeling a little confused about a structured settlement is to be expected, especially when you consider all the different components and types. For this reason, we wanted to answer the question, “How does a structured settlement work” to clarify a few things. When talking about this type of financial gain, the more you know the better decisions you would make. Of course, you would be working with an attorney who would provide guidance and answer questions too but we believe the information provided will clear up a few areas of misunderstanding.

Feeling a little confused about a structured settlement is to be expected, especially when you consider all the different components and types. For this reason, we wanted to answer the question, “How does a structured settlement work” to clarify a few things. When talking about this type of financial gain, the more you know the better decisions you would make. Of course, you would be working with an attorney who would provide guidance and answer questions too but we believe the information provided will clear up a few areas of misunderstanding.

For starters, a structured settle is money you would receive as a result of being permanently harmed by a company or person who was either negligent or intentionally performed misconduct. The money would come in one of two ways, being ordered by the court for the amount of a lawsuit or amount of award granted by a jury, or from settling with the responsible party outside of the court system. From there, you would have the option of choosing a lump sum payout or a structured settlement.

Since there are far more benefits from a structured settlement, most people go this route. Now, regarding the question, “How does a structured settlement work”, the following provides key information to three specific questions that are commonly asked.

Can I Use a Structured Settlement as a Loan?

One question that people often ask is “Can I use a structured settlement as a loan.” The answer to this is both yes and no. Although you would not use the actual settlement as a loan per se, it could be used as collateral in securing a private loan.

If you were to apply for a loan at the bank or credit union, depending on your credit, the amount being borrowed, and the length of time you have had a business relationship with the financial institution, you would be offered a collateralized or non-collateralized loan. For the latter scenario, money would be lent on your name alone but if collateral were needed to guarantee repayment of the loan, the structured settlement could be used since payments of the settlement are sanctioned by the Federal Government.

Can I trade structured settlement payments for a lump sum settlement?

Specific to the question “How does a structured settlement work”, we also wanted to answer a third question. People also want to know, “Can I trade back Structured Settlement payments for a lump sum settlement?” The only way to accomplish this is by selling some or all of the annuity payments. In other words, whether through the court system or an out-of-court settlement, once you decide to set up an annuity, you cannot change it to a lump sum payout.

Once you accept a structured settlement, you would be locked into the associated terms, meaning the agreement cannot be changed. However, because unexpected things happen, if you needed a large amount of money at once you could work with a number of different companies who would buy some or all of the annuity. The disadvantage is that to do this means paying fees, which can often be significant.

Do I earn interest on structured settlements?

The last question that we often hear is “Do I earn interest on structured settlements?” The answer to this is simply no. Now, starting back in 1982, structured settlements were set up to be tax free for local, as well as Federal levels. In addition, taking out a lump sum payment would also be tax free although if any investment were generated, that would be taxable. Regarding the question of earning interest on structured settlements, this would actually be built into the payments. Of course, if you wanted to invest any of your settlement leftover from paying required expenses, any interest earned on the investment could be collected.