Especially in personal injury cases, it can be very hard to wait for the money to start to roll in when you anticipate recovering from a personal injury lawsuit or a judgment in a related civil case. Typically, those who sue for damages who then anticipate positively recovering those damages deserve the award they are about to receive. If the deserve it, chances are good that they need it, and if they need it, it’s very likely that they need it now. If you’ve been disabled by an accident caused by another’s negligence, you may be facing mounting bills and medical costs. You may be unable to work and you may have costs associated with the injury but also not directly related to it. And given how expensive it is to achieve anything like “justice” in our legal system, you may have mounting legal bills. All of these issues make structured settlement loans a very attractive proposition.
But what, exactly, are structured settlement loans? When a defendant agrees to pay a structured settlement to a plaintiff, the total amount of those payments becomes a tax-free payment. The law allows for the recipient of a structured settlement to use that structured settlement as a means of securing structured settlement loans. The recipient need not necessarily sell all of his or her future payments; usually he will only sell a portion of them. The reason this loan process works the way it does is because the “present value” of money, especially if interest rates are high or going up, is lower than the amount of the deferred payment, the lump sum received is typically less than the total value of the annuity payments. The borrower is therefore willing to exchange that higher total value for the benefit of the lump sum funds immediately. In other words, money now is worth more to the person spending it than a greater amount of money later, but in the eyes of the lender, the exchange is one of a greater amount of value in future payments versus the cost to the lender of the lump sum paid out now.
When you receive a structured settlement agreement, still takes several weeks before you start receiving payment. This is why structured settlement loans are popular, and the reason that they may be a viable option for you. This is doubly true for those who need liquid cash now and for whom waiting for the structured payments (or even the first of the structured payments) may not be an option. In other words, if your structured settlement is, let’s say, for a thousand dollars a month, but you need three thousand dollars of liquid capital right now in order to meet immediate obligations, waiting up to forty-five days for your first payment of a thousand, or knowing that you’ll have the three thousand total sometime within the next four months, is of little benefit. Taking a loan against all or part of a structured settlement can afford real value to clients who require immediate cash. There are, however, some things about structured settlement loans that you do need to consider.
Larry Swedroe, in CBS Moneywatch, writes that structured settlement loans can conceivably offer significant tax and financial advantages. “A structured settlement is often used to settle accident and wrongful death lawsuits.,” he writes. “Under the federal tax code, you have the option to designate all or part of your financial settlement to fund a structured settlement annuity. This annuity will provide regular income-tax free payments tailored to your specific needs. …A structured settlement offers advantages that you can’t get anywhere else. Let’s start with the tax benefits. All income from your annuity is exempt — not deferred but completely exempt — from federal and state taxes. Your payments are also exempt from taxes on interest, dividends, capital gains and the dreaded AMT. …But beyond the tax and eligibility issues, there’s another, perhaps even bigger issue. How exactly do you manage a settlement so that it guarantees you the regular income you need to live? This is crucial.”
Dennis Beaver, writing for the Hanford Sentinel, cautions, “Selling structured settlement payments should require sound reasons. A Structured Settlement annuity provides a guaranteed stream of payments from a life insurance company over a period of years — often for life — as tax-free compensation, usually for a personal injury or the death of a close family member.” He says, however, that you have to get the best offer by understanding the discount rate, The higher the discount rate, the less the individual will receive. The lower the rate, the more the person gets. “Buying structured settlement payments rights can be profitable for the buyer,” he writes, “but the marketplace has become highly competitive. Some companies target sellers with aggressive solicitations — sometimes even in the form of a check that looks like found money. The small print states that if cashed, you are agreeing to sell your future payments at a discount, so do not be fooled by the temptation of free money. Structured Settlements can be of tremendous value to an injured individual and his or her family members. Before selling, seek out independent professional advice from someone whose judgment and common sense you respect,”
Brad Allen, writing for CreditCards.com, cautions that structured settlement loans must be evaluated carefully. “Cash ‘now’ means settling for fewer dollars today than the total stream of payments would add up to,” he emphasizes. “When is that trade the right decision? Structured settlements are a stream of payments that a consumer can win after an accident, workers compensation claim or legal judgment. Whoever has to pay out a structured settlement will buy an annuity contract from an insurance company. Settlement payments are guaranteed over the life of the contract. They’re certain, predictable. But circumstances can change. Perhaps you want to buy a house, start a business, get married — whatever life serves up that makes your pockets feel empty. …The company offering a lump sum for your structured settlement has overhead expenses (those TV ads aren’t free) and a profit margin to maintain, so the firm will offer as low a sum as it can. Discount rates have ranged anywhere from 8 percent to nearly 22 percent in recent years, according to a review of several websites and examples of buyout offers. …The whole process could take 45 to 60 days, even if everything goes smoothly.” Allen encourages those looking for structured settlement loans to shop around, get quotes from competing firms, and to get competitive bids even if you’ve sold part of your structured settlement in the past. You have to know how many days you have to cancel without penalty, too.
“Get all the information and disclosures upfront,” he goes on. “Disclosure requirements vary by state, but you should ask about commitments on timing, fees (the broker should pay the fees) and a guarantee on the payout dollar amount. [Also, know] who you’re dealing with. Check with the Better Business Bureau. Make sure the company you are dealing with has been in business for a few years and can do business across the United States. How financially sound are they? If you sell only a portion of your settlement, does the company ‘service’ the payout, taking all the annuity proceeds then paying out your share? That could limit your flexibility on the rest of your settlement. Consult an attorney and a financial planner. Be aware of restrictions that may exist on selling your settlement. Know the tax consequences. Know what the impact of selling will be on your future financial situation. Have a plan and stick to it.”
The major benefits of structured settlement loans, explains Forbes’ Robert Wood, is that they are at least potentially very flexible. “Provided that you consider these issues before signing a settlement agreement in your case, you can structure as much or as little as you want and take the rest in cash,” he writes. However, you have to make sure the policy is properly set up. You can’t own the annuity policy or the tax benefits won’t work. Rather than paying the cash to you or your lawyer, the defendant will send the money for the structure to a life insurance company’s subsidiary called an “assignment company.” The assignment company will buy the annuity from its parent life insurance company, and the assignment company will hold the policy and pay you each month as the contract requires. Special provisions in the tax code allow this arcane structure. Apart from special benefits to insurance companies, the arrangement allows you to be a mere recipient of the periodic payments over time. Even though you’re guaranteed to receive each payment, the tax code doesn’t treat you as owning anything except an expectation of each payment.
Wood concludes, “Structured settlements are tax efficient and can have asset protection and spendthrift advantages too. Like other tax deferral ideas, their results are more impressive the longer their term and the slower they pay out. They aren’t for everyone, and you shouldn’t structure every nickel you receive. Once they are set up, they generally can’t be changed.” Carron Armstrong of Nolo Law For All, by contrast, says that you can design a structured settlement so that it provides money when you need it most. You could, for example, set it up so that it includes a large initial payment. If you’ve been unemployed for some time and you have mounting bills, the initial payment could help you clean up those bills, pay off a mortgage, and purchase large-ticket items you need, such as a new or replacement vehicle. The smaller subsequent payments could then act as a substitute for lost income. You can also configure your structured settlement loan’s terms to account for unusual expenses particular to your case and situation. “Some settlements are designed to provide a yearly income,” Armstrong writes, “with additional amounts allowed to pay extraordinary expenses like college tuition. Payments [could also] increase over time. Structured settlements can also be designed to step up payments over the years — starting relatively low and ending higher.” Or payments could decrease over time, starting high and then getting smaller, which could be of benefit if you expect your income to increase over the same period of time. You could even choose to delay payments until you reach retirement, using your structured settlement as a nest egg to secure your golden years.
“Most personal injury plaintiffs lack the expertise to manage a large lump sum award on their own,” Armstrong cautions, “and instead must hire a financial professional for advice on how to best manage and invest your asset. Unless you have a qualified friend or relative willing to advise you for free or at a reduced cost, you will likely have to use some of your new cash to pay for this advice. Some people choose a structured settlement to avoid the hassles of managing a large sum of money. Having access to a large sum may be too enticing for some plaintiffs who do not have the skills to manage a large award. Instead of putting away the money to provide for their future personal and medical needs, some people will spend it on questionable investments or purchase expensive luxuries. If you think this might be you, then a structured settlement may be a good idea. People who have received large lump sums in personal injury cases report that relatives, friends, and even strangers often ask for a loan, to pay their bills, or money to invest in their ‘next big idea.’” This advice, while Armstrong is applying it to the settlements themselves, applies equally to structured settlement loans. It’s your money and you are entitled to it, but you want to make sure you approach that loan in a way that will improve your life, not make it more complicated or more stressful. Use your money wisely and it will take good care of you over time.