What’s A Structured Settlement Investment?

People who are awarded large sums of money for winning the lottery, obtaining a settlement in a civil suit from a company or individual, or who have inherited money are often paid in the form of a structured settlement.  Similar to a fixed annuity, structured settlements are very common in these scenarios and offer several to the payee.

These types of payment plans, also called structured settlement investments, involve a payee being compensated over a long period of time rather than a single lump sum.  One of the main reasons that settlements are structured this way to provide for ongoing financial support and to protect the payee from depleting the entire balance of the amount owed prematurely.  This is more prevalent in court proceedings where an individual may have recurring medical bills to pay for, ongoing living expenses when unable to work from an injury, or just to protect the settlement in general from being squandered (many trusts are set up this way).  Most state lotteries, for example, default to this type of structured settlement payment plan unless specifically opted out of.  The reasons for this are probably two-fold:  first, budgets might be broken if these entities were forced to pay out winnings immediately and second, lottery winners have a history of squandering their winnings.  Better to dole out the winnings little by little than ruin somebody’s life with a huge lump sum.

A structured settlement investment can sometimes be sold; however, there are numerous states that ban the sale of future payments or borrowing against a structured settlement.  If a particular settlement contract has exclusion clauses or has certain tax benefits, it is quite likely that it cannot be sold.  There is however, some regions of the U.S. that still allow these types of transactions if an annuity or settlement fits certain criteria.

While the prospect of converting a structured settlement income stream into a lump sum may seem enticing, it’s probably in your best interests to avoid doing so if at all possible.  If some unexpected emergency crops up (a medical emergency, for instance), you may have no choice.  But structured settlement companies are in business to make money, and that means buying your structured settlement at a discount.  Unless you are sure you can invest the lump sum well enough to earn a sizable annual return (hint, you probably can’t), you should hold onto your annuity.

Those of you lucky enough to have won the lottery or a large legal settlement would do wise to consider all the options carefully before taking any non-reversible action.  Remember, representatives of would-be structured settlement purchasers are not your friends.  They aren’t looking after your best interest;  rather, they are just trying to make a buck.  Don’t let your guard down.