They say the only certainties in life are death and taxes; but annuities can also be included on the short list. Among investments, annuities are one of the few that are virtually guaranteed.
That fact bodes well for injured workers concerned about their immediate and long-term financial needs. Well-designed structured settlements that are funded through annuities are tax-free, guaranteed, and incur no risk.
Workers’ compensation stakeholders who utilize them can ensure injured workers and their families are fully protected. The key is to find partners who have a deep understanding of these financial vehicles and the insight to identify the true needs of those affected.
When & Why Structured Settlement
Structured settlements are available to injured workers to settle their claims. They are an alternative to taking a set amount of cash in one lump sum.
While structured settlements have been around for decades, there are many misconceptions. They may not be appropriate for every injured worker, they are certainly worth considering on every settlement case.
One reason injured workers may opt for a lump sum over a steady income stream is the belief they can get a better rate of return and end up with more money on their own. Unfortunately, there are ample studies showing that just isn’t true. The longer time goes on, the more people who have chosen a lump sum say they have less money than expected and not enough for living expenses. Along with the tax-free status is the time value of money. In the end, it adds up to being able to meet financial obligations long term with money paid out through a structured settlement.
Having the income stream from a structured settlement funded through an annuity — as most are — assures there are no associated taxes, which makes a significant difference compared to normal investments. To get the same net rate of return from a typical investment compared to a tax-free annuity would often require putting the money in a high-risk vehicle with a steady, high interest rate, something that is very difficult and rare.
One survey of 1,000 people presented them with a hypothetical scenario and asked whether they would prefer a lump sum payment or a structured settlement. The majority chose a single payment and cited financial independence, paying off a large loan, and flexibility as their reasons.
The fact is, changes in laws and regulations since the 1970s have made structured settlements very flexible, along with guaranteed elements. Structured settlements today come in all sorts of shapes and sizes, depending on a person’s needs. For example, many people, take a sizable amount of cash up front to pay medical bills and/or debts, then have the rest paid out in certain increments at over time. While the bases of structured settlements are the same, it’s important to understand current and future needs to get the right formula.
The Art – 7 Considerations When Using a Structured Settlement
Structured settlements need to be constructed differently for each injured worker, depending on his needs. There is no ‘cookie-cutter’ settlement. Each requires a basic life care plan with future needs and expenses included.
One or more annuities may be included in a structured settlement. These should be purchased from high-rated insurance companies to ensure financial strength.
Among the factors that may be included in are the following:
Immediate expenses. Many structured settlements include upfront cash to cover such things as medical expenses, ongoing debts/loans, and attorneys’ fees.
Monthly payouts. A typical structured settlement would also include a set amount per month for a specified number of years, and include a cost-of-living adjustment. For example, the amount could cover mortgage and other associated payments for 20 years.
College education. If the injured worker has children, money would likely be included for college education. In addition to a monthly expenditure, a structured settlement could include, for example, an annual payment of $15,000 for a certain four-year period.
Retirement funding. Some structured settlements also include a lump sum payment at the anticipated retirement year to supplement Social Security. Alternatively, a monthly amount on top of that previously established could kick in with retirement, to help pay for travel and purchases for grandchildren.
Non-life contingent payments. Structured settlements can also allow for designated beneficiaries to continue receiving the future payments tax-free in the event of the injured worker’s premature death.
Public Benefits. Even a small settlement can disqualify an injured worker from public benefit programs like Supplemental Security Income and Medicaid. A special needs trust funded with a structured settlement can help maintain eligibility and protect the employee’s long-term security.
MSA. Medicare’s interests must be considered when someone settles past, present or future medical expenses to avoid jeopardizing these benefits or expose the injured worker to fines or penalties. In some cases, a Medicare Set-aside may be needed.
Injured workers and payers looking to close claims may find the best value for all sides through a structured settlement rather than a lump sum payment. When an experienced structured settlement expert is involved and the employee’s current and future needs are included, all stakeholders can see a win-win.
Author Michael Stack, CEO Amaxx LLC. He is an expert in workers compensation cost containment systems and helps employers reduce their work comp costs by 20% to 50%. He works as a consultant to large and mid-market clients, is co-author of Your Ultimate Guide To Mastering Workers Comp Costs, a comprehensive step-by-step manual of cost containment strategies based on hands-on field experience, and is founder & lead trainer of Amaxx Workers’ Comp Training Center. .