A structured settlement is a method by which a person or corporation may settle a potential liability by purchasing an annuity contract for the benefit of the claimant. Structured settlements are sometimes used to settle personal injury or wrongful death claims.This method of settlement has many advantages for the claimant.
Chief among those advantages is the fact that the interest earned within the annuity contract are tax free to the claimant. This means, for example, that an annuity contract purchased for $100,000 may pay out $150,000 over the length of the contract, and the $50,000 increase is received tax free. A second advantage is that the rate of earnings within the structured settlement is typically much higher, even before considering their tax-advantaged status, than the claimant could earn for himself. Third, the payout of a structured settlement is guaranteed, unlike an ordinary investment made by the claimant in stock, bonds, commodities or a business venture. Last, a structured settlement can be tailor-made ("structured") to suit the claimant's future needs. In sum, there are many good reasons for a claimant to accept a structured settlement rather than insist on a lump sum of cash.
Here is the dark side. There are companies which prey on the recipients (owners) of structured settlements. These companies realize that structured settlements are a very lucrative, foolproof investment if they can buy them cheap enough. That is why you see so many advertisements by companies such as J.G. Wentworth offering to buy structured settlements. The typical advertisement lures those who have a temporary, but seemingly urgent, need for immediate cash. These companies are experts at evaluating the true value of the structured settlement and taking advantage of the ignorance or circumstances of the owner. These companies offer pennies on the dollar when buying a structured settlement. It is a great deal for the purchaser and always a really, really bad deal for the owner.
If you own a structured settlement, you should always get the advise of an attorney or qualified financial adviser before agreeing to sell. This is particularly true now in our economic environment of historically low interest rates. If you absolutely must have money now, you can borrow at a low interest rate and use the structured settlement as collateral for the loan.