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Structured Settlements Versus Lump Sum Payouts

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Clients have three payment options when their claim or lawsuit is settled: 1) a lump sum cash settlement, 2) periodic payments through a structured settlement annuity or 3) a combination of cash and structured payments.

In years past, personal injury settlements always involved lump-sum payouts. While the payout was tax-free, the money earned from the settlement was taxable unless invested in tax-free municipal bonds.

Clients choosing cash settlements assume the risks associated with their investments during both stable and volatile economic times. Clients requiring lifetime care and support usually do not have the luxury of being able to weather market ups and downs and fluctuating incomes, especially when unforeseen medical emergencies are part of life. Managing the lump sum to last possibly for a lifetime is also a concern 소액결제현금화.

To reduce the risks associated with lump sum payouts, the Internal Revenue Service allows defendants to purchase insurance annuities to fund settlements to injured parties with all proceeds from the annuities tax-free.

Using annuities, injured parties receive guaranteed tax-free income benefits issued by an A or A+-rated life insurance company. Clients can decide to receive 100 percent of the funds through a structured settlement annuity or a combination of an annuity with a cash component for immediate or emergency situations.

Settlement Safeguards

The safety and security of a structured settlement annuity depends, of course, on the financial stability of the life insurance company responsible for paying the benefits. That is why only highly rated life insurance carriers are used.

State and federal solvency standards and regulations protect annuity policyholders in a number of ways. Regulators use conservative accounting and investment rules, which keep insurers from investing heavily in risky investments. Investments are typically high-quality investment grade fixed income securities. Structured settlement annuities enjoy competitive returns compared to other conservative investments in addition to their tax-free status.

In California, companies offering structured settlements must be first approved by the California Department of Insurance. The department evaluates the insurance carrier’s solvency and whether the carrier complies with California regulations. Carriers are also subject to mandatory annual audits and other financial compliance requirements.

By regulation, all annuity reserves must have assets that are equal to or exceed the corresponding payment obligations. In addition, the assets supporting these reserves may not be removed from the life insurance company. Reserve sufficiency is mandatory and is frequently monitored by state legislators and auditors. State insurance commissioners have developed these regulations to preserve the solvency of general accounts in which assets are held so that contractual obligations to policyholders are met. These general accounts support only the obligations of the insurance companies–and not the obligations of a parent company or other subsidiaries.

In other words, parent companies are prevented from raiding capital from their profitable, well-capitalized life insurance company subsidiaries.

With structured settlements, personal injury clients have the peace of mind of knowing that the underlying assets enabling them to receive compensation from their injury are sheltered. Attorneys can confidently assure clients that these assets will continue to produce regular returns designed to meet immediate and long-term needs.

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