One way is to enter into a “structured settlement”.
This doesn’t work for everyone. You have to have good control of your finances. And the settlement has to be for enough money to justify the effort involved.
Here’s how it works. In most settlements, the insurance company pays the injured person in one lump sum. If the case settles for $300,000, after the attorney fees, expenses, and money owed to health insurers are taken out, perhaps $150,000 might be left over. Maybe more, maybe less.
For a lot of people, that kind of money burns a hole in their pocket. The $150,000 becomes a nice car, a down payment on a new house, a bailout to a needy son or daughter, and – well, it can be gone real fast. And if you do hang onto it, and invest it, the earnings off it – the interest and any dividends – will be taxed.
A structured settlement is different. The company takes the “lump sum” it would otherwise pay you, and goes to another insurance company. The second insurance company takes that money, and agrees to make payments to you on a preplanned schedule, rather than all at once.
Because you don’t receive the money all at once, the funds that are not paid out at the beginning continue to earn interest. So the insurance company agrees to pay you more – the present cash value of the settlement, plus the interest. And the payments you receive are normally not taxable.
And – because it is expensive to get your money out of the “structure” – you can save money for important events, like tuition and gifts. Or just times when you think you will need a lump sum.
If you want to arrange for a structure that pays you some of the money at the beginning – to let you get that new car, or pay off debts – but then makes more payments later on down the line, that works too. In fact, most structured settlements are designed that way – with a chunk up front, and regular payments later.
In fact, the way you usually come up with the structure is by meeting with a specialist, who knows the different insurance companies and the rates they are offering. You tell him what you need, and what you anticipate, and he suggests a plan.
Last week, I asked a couple specialists to provide quotes as of 6/21/11.
Mike Stovik, of Cambridge Galaher Settlements, a Sedgwick CMS Company located in Erlanger, Kentucky, (email: Michael.Stovik@us.xchanging.com) quoted a cost of $71,500 today to pay for a lump sum of $100,000 In 10 years. (That is, the insurance company pays $71,500 today to buy the “structure”; and in 10 years, you get a check for $100,000.00). No part of the $100,000 would be taxable; but if you took the same $71,500 as a lump sum now, and invested it today with the same result ($100,000 in 10 years) $29,500 would be taxable. If you have a 16 year old daughter, that $100,000 could wind up being the down payment on her first house.
For a settlement with a present cash value of $500,000 (yes, that is a big one), Ben Taylor Fabe of Little, Meyers & Associates, Ltd. (email: firstname.lastname@example.org) in Cincinnati can provide a child who is 11 today 4 years of college tuition at $20,000 per year beginning at age 18, followed by lifetime monthly payments with a total guaranteed payout of at least an additional $1.378 million. Under present tax law, there would be no taxes on any of this. That could be used for someone with continuing needs.
Could you use $29,500 – or $878,000 – tax free? I could.
There are disadvantages to a structure. First, you need to be assured that you are dealing with an insurance company in good financial shape; but there is risk in any investment. Typically, these payments are funded with life insurance companies, or their subsidiaries.
And you need to be assured of your own financial condition; once you are in, you are in. You can sell your right to receive payments, but if you do this, it will be for considerably less than the payments are worth.
And finally, a lot of people just like to enjoy their money now.
I don’t try to persuade clients to take, or not take, structured settlements – they are options. In some cases – where you need to get money fast – they can be a bad idea. But they also present an interesting option if you don’t need the money right away, and if you can afford to wait on the money.
I have been a lawyer over 30 years. I am not an investment adviser; but if I see an option that may save my clients money, I like to let them know about it. If you want to talk about what you can do to settle your case, speak with an experienced Attorney – call me, William Strubbe, at 513-621-4775 in Cincinnati.
Because all situations are different, and because there may be other facts pertaining to your case that I don’t know about, you should not rely on this answer for legal advice. I am not your attorney, and no lawyer client relationship has been formed.
IMPORTANT UPDATE – I wrote this blog in June, 2011. Just last week – in September, 2011 – I contacted an insurance company to set up a structured settlement to pay a 15 year old girl a series of payments beginning when she starts college in three years, and ending when she turns 21 – in other words, a college tuition schedule.
I was amazed to find that the insurance company could only quote me an interest rate of .6%. The structured settlement specialist attributed this to a bad market – interest rates for less than 10 years are low right now. Higher rates are available for longer distribution periods.
Interestingly, after talking to her parents, they went ahead with the structured settlement plan. We did not discuss why – but this way they know that when the tuition bills come, that money will still be there. It won’t be spent on a car, a hot outfit, or a trip to Mexico.