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Disadvantages Of Structured Settlements

Aug 11, 2008
Structured settlements are generally used to compensate individuals who have been awarded a huge sum of money. They are most commonly used when an individual himself has been seriously injured or disabled due to the negligence of another individual or organization. They are also very frequently used to pay out jackpot lottery winnings. Instead of paying a huge lump sum amount of cash, structured settlements are generally paid out over a spanned period of time. Payments are also issued monthly, quarterly, semi-annually or annually. These payments are strongly backed by an annuity distributed through various life insurance companies. Structured settlement payments are tax-exempt and hence tax free.

There are various types of structured settlements in all. Each is designed and structured to suit an individual's financial requirements. Some are paid out for a specific period of time, while others are paid out for the remainder of the recipient's life. When structured settlements are paid out over a period of time, these payments are referred to as "Designated Period" or "Period Certain Annuities". What this means is the recipient will be receiving a fixed amount of money at a specific time monthly, annually for a predetermined number of years. If the recipient dies intermittently before the structured settlement is paid in full, the remainder will be distributed to the designated beneficiary (of the party or the individual). Life annuity structured settlements are paid to the recipient for the remainder of their lifetime. It's important to note in many cases "life" might be actually referring to a certain number of years based on the individual's life expectancy as determined by the company. Also referred to as "Period Certain", this form of structured settlement annuity will have a transfer to the beneficiary if the recipient passes away prior to the decided number of years.

One might get Lump sum payment at a future date through Lump sum annuities rather than the traditional Structured Settlement payment. This type of structured settlement is inviting the people who have children or some form of beneficiaries. The funds can be arranged and ordered to be paid out when the child enters college or whenever the benificary might enter a period of financial necessity and helps to pay for educational expenses. There are two modes of lump sum annuities called "Lump Sum" and "Life Contingent Lump Sum." The first allows transfer of the annuity to a designated beneficiary, while the second one does not. Life annuities generally provide monthly structured settlement payments for entire life period. The two types of life annuities available are -- "Life Only" and "Joint and Survivor." The first kind offers no chance to assign a beneficiary, whereas the second continues payments to the beneficiary for the remainder of their life. Last, but least, is the Temporary Life Annuity. This type of structured settlement pays in regular periodic payments for a specific number of years. The annuity term ends when the recipient expires, as there is no beneficiary provision in the agreement.

Even though structured settlements provide long-term financial commitment, there are a few known drawbacks. One of the main drawbacks is once the papers are signed, there is no way to modify or change them. If unexpected expenses are incurred, money cannot be withdrawn from the structured settlement account. Since this documentation is more complex than expected, the attorneys should be well-versed with the subject of contention and preferably also a certified structured settlement broker. If structured settlements documents are not properly drafted and created through the complete set of litigations involved will be a head ache process to the recipient of the structured settlement and will have a sleep less nights.

One may or may not use his or her structured settlement payments as collateral for a loan. The reason is that the federal law is designed to provide these benefits to one on an income tax-free basis also prohibits from assigning or encumbering them.

Again, the federal law that assures the payments one receive are on a tax-free basis, also prevents converting payments into a "lump sum" settlement.

No one except the individuals specified in the Settlement Agreement can be made the payees on your checks that you receive from the structured settlement company. Exceptions may be made as the consequence of a court order.
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