The Dangers of a Structured Settlement

People who decide to enter a structured settlement payment plan may run into some disadvantages.  If you choose to have installments paid to you on a schedule, you may not have the funds you need for a big-ticket purchase, unexpected medical bills, or the money to make a down payment on a house or car.  If you have any hint you will be making a large buy, or will want to move to a different home, you might consider investing a lump sum settlement into your own investments.

A third-party company that may ask to buy your structured settlement for a lump sum buyout may approach you.  You should be cautious about anyone with this offer.  About two thirds of the states have laws restricting the sale of structured settlements and there are also federal guidelines that apply.  Insurance companies discourage selling structured settlement by transferring these annuity accounts to a third-party.  You will need to check on your state and federal laws about buyouts of a structured settlement. 

There are other special considerations when considering this form of settlement.  You may be susceptible to exploitation by insurance companies by excessively high commissions charged in setting up the settlement.  Another problem could be an overstated value when setting up the structured settlement.  One way to safeguard against that is to be sure the defendant is putting the entire settlement into the annuity so the full value of the settlement will go to the injured party.

Another danger to watch for is if the lawyer is also in the insurance business.  He may be setting up the annuity and pocketing a large commission while doing it.  Or they may refer their client to a particular financial planner while not revealing they will get a referral fee from the financial adviser.  You need to know if your lawyer is involved in any financial service they refer you to.

Then consider the life expectancy of the injured person.  Many people who receive large worker's comp settlements will have a shorter life because of the injury.  You must consider this fact when opting for a structured settlement.  In worker's comp cases, if you decide to take the structured settlement instead of a lump sum, you may need to know that your spouse will not continue receiving your scheduled payments if you die!  If you are considering a structured settlement, write in the contract that you want the balance of the settlement paid into your estate.  It makes sense for the insurance company to want a structured payment schedule if the client is not healthy!  They can bail out of the settlement and your spouse and family may be in financial difficulty on your death.

If your settlement is large, you may want to consider spreading the settlement among several different companies.  This will provide you some protection in case of an unexpected bankruptcy by the company handling your settlement.  If you are covered by more than one company, you can be assured your full settlement will be paid out.