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Structured settlements have long been viewed as a reliable method for receiving compensation from legal settlements or insurance claims. However, the question of whether these payments are truly “guaranteed” requires a nuanced understanding of how structured settlements work, their underlying financial mechanisms, and the various factors that affect their security.
Let’s take a look at just how reliable these financial products are…
What is a structured settlement?
A structured settlement is a financial arrangement that provides periodic payments to a claimant as compensation for personal injury, wrongful death, or other claims. Instead of receiving a lump sum payment, the recipient gets regular payments over time, often spanning many years or even a lifetime.
The foundation of security
Structured settlements are generally considered highly secure for several key reasons:
- Insurance company backing: The primary guarantee behind structured settlements comes from the insurance companies that underwrite them. These companies, known as life insurance companies, create annuities that fund the settlement payments. They are required by law to maintain substantial reserves to ensure they can meet their financial obligations.
- State regulation and oversight: Insurance companies operating in the United States are heavily regulated at the state level. Each state has an insurance commissioner who oversees insurance companies’ operations and ensures they maintain adequate financial reserves. This regulatory framework provides an important layer of protection for structured settlement recipients.
- Legal protection: The U.S. government has recognized the importance of structured settlements through specific legislation. The Periodic Payment Settlement Act of 1982 established tax benefits for structured settlements and created additional legal protections for recipients.
Multiple layers of protection
Structured settlements incorporate several safeguards:
- State guaranty associations: Every state has a guaranty association that provides an additional layer of protection if an insurance company fails. These associations typically cover structured settlement obligations up to certain limits, which vary by state.
- Federal tax benefits: The tax-free status of most structured settlement payments (when used for personal injury cases) represents an indirect form of security, as it protects the full value of the payments from taxation.
- Conservative investment requirements: Insurance companies are required to invest structured settlement funds in conservative, stable investments, primarily high-grade corporate and government bonds.
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Potential risks and limitations
Despite these protections, structured settlements are not without risks:
- Insurance company solvency: While rare, insurance companies can fail. Though state guaranty associations provide protection, there may be limits to the coverage amount and delays in payment during the transition period.
- Inflation risk: Fixed payment structures may not keep pace with inflation over time, reducing the real purchasing power of the payments. Some settlements include cost-of-living adjustments to address this risk, but many do not.
- Inflexibility: Once established, structured settlements are generally inflexible. Recipients cannot easily modify payment terms or access funds early without significant penalties and potential loss of tax benefits.
Best practices for maximum security
To maximize the security of a structured settlement:
- Choose a highly rated insurance company: Select an insurance carrier with strong financial ratings from multiple rating agencies (A.M. Best, Standard & Poor’s, Moody’s).
- Understand state guaranty limits: Research your state’s guaranty association limits and consider spreading large settlements across multiple insurance carriers if necessary.
- Consider inflation protection: Evaluate whether building in cost-of-living adjustments makes sense for your specific situation.
- Seek professional guidance: Work with experienced settlement planners and legal counsel who can help structure the settlement to meet your long-term needs while maximizing security.
Comparison with other payment options
When evaluating the security of structured settlements, it’s helpful to compare them with alternatives:
Lump sum payments
- Provide immediate access to funds.
- Carry investment and spending risks.
- May result in higher taxation.
Market-based investments
- Potentially higher returns.
- Greater volatility and risk.
- No guaranteed income stream.
Traditional annuities
- Similar security features.
- May have different tax treatment.
- Often higher fees and less favorable terms.
The takeaway
While no financial product can be absolutely guaranteed, structured settlements offer one of the most secure forms of long-term payment available. Their multiple layers of protection, including insurance company backing, state regulation, and guaranty associations, provide significant security for recipients.
However, understanding the limitations and potential risks is crucial for making informed decisions about settlement options. When properly arranged, structured settlements can provide reliable, tax-efficient income streams for decades to come.
Let Peachtree help
At Peachtree Financial Solutions, we’ve helped thousands of people get their money sooner by purchasing their structured settlement payments for a lump sum of cash. Selling your payments is a regulated process and we have a lot of experience with these transactions. And while every annuity is unique, which means every payment sale will be different, they all have the same basic five steps:
- Call one of our representatives.
- Receive a free, no-obligation quote for the sale of your payments.
- Review and sign the purchase agreement.
- Court order process.
- You get your cash!
Why should you choose Peachtree?
It’s all part of something we call the Peachtree Promise: our experienced, dedicated representatives listen to your goals and clearly explain your available options. We meet you where you are without judgement and work hard to help you meet your financial goals. Getting your quote is completely free, and you’re under no obligation to sell to us if you aren’t completely satisfied with what you hear.
