The Advantages and Disadvantages of Structured Settlements

When victims of medical malpractice and other catastrophic accidents receive awards in personal injury lawsuits, obtaining the award is only half the battle. Of equal, or greater, importance for the person’s future is constructing the settlement structure in a way that best protects their long-term interests.

Personal injury settlements are typically structured in one of two ways: lump-sum awards, where the beneficiary receives all the funds at once, and structured settlements. Structured settlements are essentially contracts with insurance companies, where the insurer agrees to make regular, ongoing payments, otherwise known as annuities, for a period of time or – as is particularly the case with younger victims -- for the beneficiary’s lifetime.

When properly constructed, structured settlements provide a variety of advantages for beneficiaries. As a starting point, they can protect the person by helping ensure that the settlement award isn’t quickly depleted, which may be a danger if the family is not used to possessing significant assets or runs into future financial troubles.

Likewise, by providing a steady stream of income, structured settlements offer a layer of protection against poor investment decisions.  Finally, structured settlements are tax-free and also more difficult for creditors and ex-spouses to access. 

However, structured settlements are not necessarily the best option for everyone.  In some cases, the injury victim may need more money upfront -- for example, if the individual’s  family need to retrofit the home to accommodate the person’s disabilities, or purchase special equipment or help pay educational expenses. Because of circumstances like these, many special needs planners recommend a hybrid approach, where the settlement makes larger payments at various points over the beneficiary’s lifetime, such as periodic lump-sum payments at certain dates to pay for anticipated obligations.

Another disadvantage is that the return on a structured settlement annuity is set when it is purchased, meaning that you are locked in to the prevailing interest rates.  This would be less favorable in recent years due to the low interest rate environment.

A major drawback of a structured settlement is that it may jeopardize the beneficiary’s eligibility for public benefits, which may be particularly problematic when the person’s medical needs are covered by Medicaid rather than private health insurance.

To maintain eligibility, beneficiaries should consult their special needs planner for guidance in setting up a "first-party" special needs trust. These trusts can be used to maintain a beneficiary’s eligibility when receiving either a lump-sum payment or a structured settlement if the payments are made payable to the trust. Although similar to other trusts, these trusts, otherwise known as “pay-back” trusts, must contain a provision requiring the trust to reimburse their state Medicaid program for Medicaid-funded expenses incurred during the life of the trust beneficiary.

To receive a personal injury award or settlement in the most advantageous way, consult with your special needs planner.