“Mr. Beaver, about a year ago I was in a bad auto accident caused by a 17 year old running a red light. I will require at least two operations in the future, keeping me off work for months. After attorney fees and medical bills, the settlement will net me about $200,000.
“I have never been a good money manager, buying ‘toys’ I don’t need, and making loans to friends — which are seldom repaid.
“My lawyer says the best way to deal with those problems is by having most of the settlement money put into an insurance annuity, a Structured Settlement.
“I’ve read your column for years and trust your advice. What would you recommend? Thanks, Ben.”
Accepting a large sum of money = Pressure from every direction
“That’s excellent advice,” New York attorney Derek Sells commented when we read him Ben’s email. Sells is the Managing Partner of The Cochran Firm’s New York office and is a widely respected litigator who often suggests structured settlements for his clients.
“Accepting a large sum of money makes you a target, resulting in pressure coming from every direction: friends, family, church, boyfriends, girlfriends, college friends, just about everyone you know,” Sells underscores.
“Ben will hear endless reasons why he should ‘loan’ friends money for car repairs, leaking roofs, credit card debt, and child support. Then there’s the inevitable pitch from some distant family member who styles himself or herself as a financial expert and promises to create a huge return on his money in 6 months.”
“Start giving in, and Ben moves from target to financial victim,” according to Peter Arnold, a longtime structured settlement consultant and former Deputy Executive Director of the structured settlement industry’s trade association. “It’s like throwing a raw steak into the ocean when you know that sharks are there.”
“Often, the temptation to share this sudden wealth overrides better judgment about saving it for the future. A structured settlement is like putting a German Shepard in front of your money to make sure efforts to grab and spend it easily fail, and allows you to honestly state, ‘I would love to loan you money, but it is beyond my reach,’ he points out.
How a structured settlement works — Tremendous tax advantages
In a structured settlement, instead of receiving a single, lump sum payment, part or all of the money is used to obtain an insurance annuity which provides a guaranteed, long-term stream of tax-free income payments tailored to the accident victim’s specific needs, such as money to pay for college or possibly an operation years down the road.
Most people are not good at managing large amounts of money suddenly received. Experience shows that within two to three years, many accident victims have spent every cent when given a lump sum, often winding up in bankruptcy and some on welfare.
So, to help prevent that from happening, in 1982 Congress authorized tax-free structured settlements to encourage periodic payments and financial independence for accident victims.
“Even in today’s low interest environment, 4% is a typical rate paid on the money held by the insurance company. So over the years, the annuity grows, and the more time before payments begin, greater the payout. If Ben took the money as a lump sum and invested it, earnings would be taxable, not to mention risk of loss,” Sells observes.
Flexibility and safety
“One of the great advantages is flexibility of payments, designed to meet future medical, educational and income needs of injury victims and their families,” Arnold notes.
“Let’s say that a year old girl loses her father in an auto accident and a large settlement is negotiated. Payments could start when she is college-age, and then every so many years to help in buying a home, raising a family, for her lifetime and even to a designated beneficiary if she were to die prematurely.”
“Placing your structured settlement with a highly-rated company, knowing that your payments are guaranteed--not affected by ups and downs of the stock market–buys piece of mind and the payments continue even if you are able to return to work, unlike SSI or Medicaid benefits,” Sells adds, and cautions:
“Do your homework and importantly, be sure the life insurance company you choose for the structure is highly rated ‘Superior’ by at least a couple of rating agencies like Standard & Poor’s or AM Best. Remember, the Titanic was thought to be unsinkable.”
Why did you let me spend the money?
“Some clients just will not listen,” Sells remarked, “and one stands out, a middle-aged woman who netted over $100,000. She took trips to Las Vegas with friends, blew through the money, returning to see me about a year later, asking:
“Why did you let me spend the money?”