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A structured settlement is a financial arrangement that provides periodic payments to an individual who has received a personal injury settlement or similar legal award. Unlike a lump sum payment, structured settlements distribute money over time, often providing tax benefits and long-term financial security. However, negotiating an effective structured settlement requires knowledge, preparation, and strategy.
This guide will walk you through the process of negotiating a structured settlement, from understanding the basics to finalizing the agreement. Whether you’re a plaintiff, attorney, or simply exploring your options, these insights will help you navigate this complex financial arrangement.*
Preparing for negotiation: Assessing your financial needs
Before entering negotiations, conduct a thorough assessment of your current and future financial needs:
- Immediate medical expenses: Calculate all current medical bills and treatment costs.
- Future medical needs: Estimate ongoing care, therapy, medications, and potential surgeries.
- Lost income: Determine both current lost wages and future earning capacity.
- Living expenses: Evaluate daily, monthly, and annual costs.
- Special needs: Consider education, housing modifications, specialized equipment, etc.
- Life expectancy: Work with medical professionals to establish a realistic timeframe.
Assembling your negotiation team
An effective negotiation team might include:
- Personal injury attorney: To advocate for your legal interests.
- Structured settlement broker: To design and explain potential settlement structures.
- Financial advisor: To help evaluate the long-term implications of different options.
- Accountant or tax professional: To explain tax implications.
- Medical experts: To testify about future medical needs and life expectancy.
Gathering documentation
Collect comprehensive documentation to support your position:
- Medical records and bills.
- Expert medical opinions regarding future care needs.
- Employment records and income verification.
- Documentation of out-of-pocket expenses.
- Life care plans developed by medical professionals.
- Economic loss assessments by financial experts.
Developing your negotiation strategy
A few considerations to keep in mind before you move forward:
Setting clear objectives
Define your priorities before entering negotiations:
- Minimum acceptable total settlement amount.
- Ideal payment structure (frequency, duration, growth rate).
- Non-negotiable elements (e.g., coverage for specific medical procedures).
- Acceptable compromise areas.
Understanding the other side’s perspective
Insurance companies and defendants typically aim to:
- Minimize total payout amount.
- Reduce immediate cash flow impact.
- Ensure finality of the settlement.
- Avoid future litigation.
Anticipating common tactics
Be prepared for various negotiation tactics:
- Lowball initial offers: Designed to anchor negotiations at a lower figure.
- Delay tactics: Attempting to pressure you into accepting less favorable terms.
- Highlighting uncertainties: Emphasizing unknowns to justify lower offers.
- Questioning medical evidence: Challenging the extent of injuries or future needs.
- Presenting “take it or leave it” offers: Creating artificial deadlines.
Evaluating offers
When assessing counteroffers, consider:
- Present value: The current worth of all future payments.
- Payment schedule: Does it align with anticipated needs?
- Growth rate: How payments increase over time to account for inflation.
- Guarantees: Payment periods and beneficiary provisions.
- Funding company: Financial strength and rating of the annuity provider.
Design options
Common design elements include:
- Initial lump sum: For immediate expenses and attorney fees.
- Periodic payments: Monthly, quarterly, or annual disbursements.
- Scheduled increases: To account for inflation or anticipated needs.
- Large periodic payouts: For major anticipated expenses (e.g., surgeries, education).
- Lifetime payments: Guaranteed for life, regardless of longevity.
- Beneficiary provisions: Continued payments to heirs if the recipient dies.
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Finalizing the agreement
Should you and your team decide to accept an offer, make sure you’re organized accordingly:
Key documents
A structured settlement typically involves these documents:
- Settlement agreement: The legal contract between parties.
- Qualified assignment: Transfers payment obligation to a third party.
- Annuity contract: The financial instrument funding the payments.
- Release: Waiver of future claims related to the case.
Critical terms to review
Before signing, carefully review:
- Payment schedule: Exact dates, amounts, and duration.
- Beneficiary provisions: What happens if you die before all payments are made.
- Tax language: Ensuring proper qualified status under IRC Section 104(a)(2).
- Inflation protection: How payments adjust over time.
- Funding company: Financial strength rating and guarantees.
- Assignability: Restrictions on selling payments in the future.
Court approval
In many cases, particularly those involving minors or significant amounts, court approval may be required in order to finalize a settlement:
- The judge will review the settlement to ensure it’s fair and reasonable.
- You may need to attend a hearing to confirm understanding.
- The court may require testimony from medical or financial experts.
Partial structures
Keep in mind, you don’t have to structure the entire settlement:
- You might take a portion as a lump sum for immediate needs.
- Structure the remainder for long-term security.
- This hybrid approach often provides the best of both worlds.
Potential pitfalls to avoid
Ideally, you and your team can avoid these potential issues:
- Underestimating future needs
- Consult with medical experts about long-term prognosis.
- Consider inflation’s impact on healthcare costs.
- Plan for worst-case scenarios, not best-case.
Overlooking tax implications
While personal injury settlements are typically tax-free, some portions may be taxable.
- Interest income on lump sums is generally taxable.
- Punitive damages are usually subject to taxation.
Failing to consider inflation
- A $1,000 monthly payment will have significantly less purchasing power in 20 years.
- Build in cost-of-living adjustments or scheduled increases.
- Consider using inflation-protected annuities.
Neglecting liquidity needs
- Emergency funds should be accessible.
- Some flexibility should be built into the payment schedule.
- Consider reserving a portion for unexpected expenses.
The takeaway
Negotiating a structured settlement is a complex process that can significantly impact your financial future. By understanding the basics, thoroughly preparing, developing a clear strategy, and assembling the right team, you can maximize the benefits of this arrangement.
Remember that each case is unique, and what works for one person may not be ideal for another. Take the time to carefully consider your specific needs and circumstances, and don’t hesitate to seek professional advice throughout the process.
Let Peachtree help
At Peachtree Financial Solutions, we’ve helped thousands of people get their money sooner by purchasing their future annuity 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.
- We process the agreement with your insurance company.
- 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.
*This information is provided for educational and informational purposes only. Such information or materials do not constitute and are not intended to provide legal, accounting, or tax advice and should not be relied on in that respect. We suggest that You consult an attorney, accountant, and/or financial advisor to answer any financial or legal questions.
