FAQs

Are there income taxes on structured payments?
Generally no federal income taxes are due on the amount of each Structured Settlement payment that covers amounts described in Internal Revenue Section Code 104(a)(2) (See also IRS Revenue Ruling 79-220) relating to personal physical injuries or physical sickness.

A lump-sum settlement of a physical injury claim is not taxed either; however, most investment earnings on the lump sum will be taxable.

How valuable is this tax advantage?
The chart below shows the value of receiving tax-free structured payments. The chart compares the rate you would have to earn on another investment to equal the Structured Settlement internal rate of return.

Interest rate required to equal structured rate

Structured Settlement Internal Rate of Return	15% Tax Bracket	28% Tax Bracket	33% Tax Bracket	35% Tax Bracket
5.00% 6.00% 7.00% 8.00%	5.88% 7.06% 8.24% 9.41%	6.94% 8.33% 9.72% 11.11%	7.46% 8.96% 10.45% 11.94%	7.69% 9.23% 10.77% 12.31%

For example: assume you are in the 28% federal tax bracket and invest a lump-sum settlement in a Bank Certificate of Deposit (CD). The CD interest rate would have to be 8.33% to get the same return after taxes are paid as a structure with a 6% internal rate of return. If your state tax is 3% and your local tax is 2% (total tax is now 33%), the CD interest rate would have to be 8.96% to equal a 6% interest rate on a structure.

Couldn't I get this same kind of growth if I settled my claim for cash and invested the money on my own?
Perhaps, but only the original settlement amount you receive is tax-free. Any interest earned upon the investment will be subject to tax.

Can a claimant purchase an annuity after the settlement and still qualify for a tax-free benefit on the earnings?
No. According to Internal Revenue Section Code 104(a)(2), this tax advantage only applies if a structure is chosen at the time of the claim settlement.

Why is a structured settlement offer valid for only a short period of time?
Every structured settlement broker is forced to limit the offer to a certain period of time (usually ranging from 7-30 days) because annuity rates are subject to change. Annuity rates fluctuate depending upon what is happening to interest rates in the economy at large. For example, an annuity costing $100,000 today could potentially cost $110,000 in a few months from now if interest rates rise.

Are structured payments guaranteed?
Structured payments are guaranteed to be paid no matter what happens to interest rates or the stock market.* You do not have to worry about where to invest or reinvest the settlement.

With a lump sum-settlement, you must decide how to invest the money. Your investment income may depend upon current or future interest rates or investment instrument results. Some investments offer an attractive initial interest rate but for only a short period and then the rate decreases.

* Guarantees are subject to the claims-paying ability of the insurer.

What happens when a structure is accepted?
The Defendant or its Insurer makes a legally binding promise to provide the future structured payments. You agree to accept the structure and any cash at the time of settlement and release the Defendant and its Insurer.

What is a structured settlement assignment?
Sometimes the defendant or Insurer wants to transfer or “assign” the responsibility to make future structured payments to an Assignment Company. Companies accepting these Assignments specialize in administering structured settlements.

When an Assignment is made, it is part of the structured settlement offer. When you accept the structure, you agree to rely on the Assignment Company to make the future payments.

What is the Rating Advantage?
The substandard annuity provides the injured party with an extremely valuable financial advantage. The substandard, or rated age plan, can consider the current medical condition of the injured party, even when the injury or physical illness is unrelated to the accident or loss in question.

Example: In order to receive $2500 a month for the rest of their life, an otherwise healthy , 40 year old annuitant will need to place $775,000 in a structured settlement annuity. If that same 40 year old annuitant had a health condition, such as diabetes or heart disease, they could be given a "rated age" of 60 — which means they would only need $492,000 in a structured settlement annuity in order to receive $2500 a month for life.

How is a structure funded?
Most structures are funded with annuity contracts. The Defendant, Insurer or Assignment Company responsible for making the future periodic payments must buy and own the funding contract. This is necessary to assure your payments are tax-free to the extent allowed by the Internal Revenue Code. However, the owner has the annuity contract payment sent directly to you.

Are Structured Settlements secure?
To assess the security of a Structured Settlement, you should make sure that the company issuing the funding contract is financially sound. One method of annuity evaluation is to look at ratings given by A.M. Best, Standard & Poor's, Moody's and Fitch. These companies specialize in analyzing the financial strength and dependability of insurance companies. Financial Settlement Services (FSS) ensures that only highly rated companies are offered to you.

In the unlikely event that the funding contract does not pay in full, the assignment company must make up any difference if there has been an assignment. Sometimes, a parent or affiliated company of the assignment company guarantees its obligation to make payments in full. If there is no assignment, the Defendant or Insurer promising the structured payments must make up any shortfall.

FSS can give you more information about the companies issuing the funding contracts and their financial ratings, as well as about assignment companies and their guarantees.

What happens to the structured payments if the claimant dies?
Structured plans can have payments guaranteed for life or for fixed periods of time. When a structure is guaranteed for a fixed period, the annuity guarantees payment — whether or not the claimant is living when the payment is due. For example, if the settlement was structured to be payable for life with a guarantee for 20 years, and the claimant dies in the fifth year, the annuity payments would continue to the beneficiary for the remaining 15 years. If the claimant lives beyond 20 years, the annuity payments would continue for the balance of the claimant's life. The beneficiary's payments will be tax-free as well.

How might a potential recipient of a Structured Settlement protect himself or herself from the effects of inflation?
One method is to build into the Structured Settlement payment schedule either periodic stepped increases to help offset any inflationary effects.

Are Structured Settlement annuities widely available through most financial planners and life insurance agents?
No. Because of the specialized nature of Structured Settlements and their unique design and focus, only a licensed and appointed Structured Settlement consultant can handle this type of transaction.

Can a claimant use a Structured Settlement annuity as security for a loan?
No. You may not give a third-party lender a security interest in the annuity. This is because you are the recipient of the annuity payment, but not the actual annuity owner.

Can a claimant sell the annuity to a third party for today's cash value?
The annuity isn't the claimant's to sell for the reason explained above. The annuity is owned by the Insurer (or the life company affiliate) and they have accepted the obligation to make the scheduled payments. However, due to recent legislation, some or all of your benefits may be given to a third party if you qualify, which requires proof of extraordinary circumstances and approval by a court of appropriate jurisdiction. If the requirements are not met, the third party attempting to buy the annuity will be subject to a 40% tax penalty. The purpose of this law is to protect the future needs of the claimant—the original intent of the Structured Settlement.

Financial Settlement Services is a division of Nationwide Mutual Insurance Company. The information is not intended to provide legal or tax advice. Due to various tax codes and regulations, you should always seek independent legal and tax advice.