Sage advice from a Wall Street Pro, Advantages & Challenges of Structured Settlements
Providing claimants with a structured payment schedule over an extended period of time, structured settlements have become more and more common as the preferred way of financial recompense in court matters. Although they have a number of benefits, the main issue is the lack of liquidity.
However, structured settlements can be customized to meet current and future financial needs when working with a settlement expert. We shall explore the advantages and disadvantages of structured settlements in this blog post, looking at both of their possible outcomes.
Advantages of Organized Settlements
A number of benefits of structured settlements support stability and financial security. First, by making regular payments over a prearranged period of time, they provide a consistent income stream and provide a dependable source of funding for those with incapacitating injuries or long-term care requirements. This sense of stability is brought about by the financial security that takes care of everyday living needs, medical bills, and rehabilitation charges.
Furthermore, long-term planning is made possible by structured settlements, enabling claimants to design a financial roadmap that is in line with their requirements and objectives. People may prepare for the future with confidence when payments are spread out over time, as it guarantees a steady source of income for years to come. This method helps claimants achieve their financial goals and peace of mind by making budgeting easier and enabling them to stick to their spending plans.
Another benefit of structured settlements is the reduction of taxes. Under the existing tax code, revenue from structured settlements is often tax-free. This raises the settlement's total worth by enabling claimants to receive their full benefit from their compensation without having to worry about owing more taxes. Tax-deferred structured settlement payments are made even in cases where the settlements do not qualify for income tax exclusion.
Structured settlements also act as a deterrent to reckless expenditure. Claimants are shielded from the temptation to spend the whole settlement cash right away by the way it is structured. This preventive action guarantees that money will always be available for future unanticipated events and necessities while also preventing financial mismanagement. Structured settlements support long-term financial stability by encouraging sound financial practices.
Structured Settlement Challenges
A few disadvantages of structured settlements should be taken into account. Initially, they impose restrictions on the flow of payments, meaning that claimants cannot immediately obtain the entire sum. Fortunately, settlement agreements can be created to include a lump sum payment of cash available right away to cover unforeseen bills or debt payments. The residual money may be invested in a structured settlement that disburses payments according to a timetable determined by the plaintiff.
Second, because the agreed-upon payment schedule is set in stone and cannot be changed, structured settlements are not flexible. Claimants who need a lump payment for important investments or life events, or who face unforeseen changes in their financial situation, may find this inflexibility troublesome.
Finally, structured settlements may result in lower returns when compared to other investments. However, these settlements offer a fixed interest rate that is not impacted by market volatility. Additionally, traditional investments often come with overhead fees averaging 1.5% to 2%, while structured settlements do not have any additional fees. When considering the guaranteed interest rate and lack of overhead fees, structured settlements can be a viable option for investors. In recent years, structured settlements have even reached their highest rates in decades.
Although structured settlements may have some drawbacks, their advantages tend to outweigh the cons in numerous situations. The financial security, long-term planning opportunities, and tax benefits associated with structured settlements provide valuable peace of mind and stability for those receiving them. By collaborating with an experienced settlement consultant, individuals can create a structured settlement plan that meets their unique financial needs, ensuring both immediate and future requirements are fulfilled. While it is important to acknowledge the downsides of structured settlements, their benefits often make them a sensible and beneficial option for claimants looking for lasting financial security.
States that currently require an Independent Professional Advisor:
Some States Require IPA Letters
Alaska
California
Delaware
Louisiana
Maine
Minnesota
Missouri
Independent Professional Advisors (IPAs) are certified financial services experts.
The Structured Settlement Act of 2002 defines the qualification for this role as professionals working as certified public accountants, actuaries or licensed professional advisors.
Their expertise enables them to consider the pros and cons of a major financial decision and to provide you with a written recommendation. Structured settlement recipients pursuing the sale of payments can meet with an IPA and receive a recommendation in favor of or in opposition to selling payments.
The cost will depend on which type of professional you turn to and their rates. Consultations (which include formal documents) can range from $500 to $1,500. Some buyers will reimburse sellers for this cost, but will not directly choose and pay for the IPA as this could result in a conflict of interest. Federal law prohibits the IPA from being affiliated with or employed by the settlement buying company. This protects the seller and ensures advice is impartial.
Sellers then bring the recommendation to court—if the letter endorses the transfer—when attending the required hearing that is part of the selling process. A judge considers the IPA’s recommendation as a factor in deciding whether or not to give approval.
As a Registered Investment Advisor we can help in the decision making process of
liquidating an annuity or structured settlement.
Take the next step, schedule a free consultation and learn how we can help you. Asset and Cash Management Solutions
