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FREQUENTLY ASKED QUESTIONS --
STRUCTURED SETTLEMENTS


Have a question about Structured Settlements? Click any question link below to read the answer.
More FAQ Topics....

Structured Attorney Fees

Punitive Damages

Maintaining Tax Free Status

1. Can a plaintiff purchase a structured settlement annuity and still get payments tax-free?
2. Can a plaintiff know the cost of the structured settlement without jeopardizing the tax advantages?
3. How does a structured settlement achieve tax-free payments to the plaintiff?
4. What is "constructive receipt"?

State Guarantee Funds

1. What are state life insurance guarantee funds?
2. What are the limits of state life insurance guarantee funds?
3. Which states have guarantee funds?

Life Expectancy

1. How does life expectancy affect the cost of a structured settlement?
2. What is a rated age?
3. What can cause a reduced life expectancy?

Guaranteed Payments

1. What is a "guaranteed" or "certain" payment?
2. Does a "guaranteed" or "certain" payment cost extra?
3. How long should a "guarantee" or "certain" period be?

Maintaining Tax Free Status

1. Can a plaintiff purchase a structured settlement annuity and still get payments tax-free?
No. Only a qualified settlement fund (468(b)(1)), the defendant, the insurer or an assignment company may purchase an annuity to fund a structured settlement.Top
2. Can a plaintiff know the cost of the structured settlement without jeopardizing the tax advantages?
Yes. Knowing the cost of a structured settlement does not constitute constructive receipt. IRS Private Letter Ruling 83-33035 states that a plaintiff may know the cost of the structured settlement without endangering its tax-free nature. Top
3. How does a structured settlement achieve tax-free payments to the plaintiff?
The settlement documents must conform to Revenue Ruling 79-220 and if there is an assignment, to Internal Revenue Code (IRC) § as well. Then each payment will be tax free under Internal Revenue Code (IRC) § 104(a)(2). Top
4. What is "constructive receipt"?
When a taxpayer, while not actually receiving funds, has them set aside, credited to an account, or otherwise made available, they are 'constructively received' and will be taxable. (Income subject to substantial limitations or restrictions is not considered constructively received.) Plaintiffs should avoid having constructive receipt of the funding asset in structured settlement transactions. Top
State Guarantee Funds

1. What are state life insurance guarantee funds?
Many states have legislated guarantee funds for life insurance products, including annuities. These funds may provide an extra level of protection should a life insurance company fail. Top
2. What are the limits of state life insurance guarantee funds?
Most guarantee funds limit liability to $100,000 in cash value or $300,000 in total benefits per life. These limits vary from state to state. Top
3. Which states have guarantee funds?
All states have a life insurance guarantee fund. Top
Life Expectancy

1. How does life expectancy affect the cost of a structured settlement?
The plaintiff's life expectancy affects the cost of a structured settlement only if the settlement contains life contingent payments. The shorter the life expectancy, the lower the cost. Life expectancy is dependent upon the age, gender and health status of the individual. Top
2. What is a rated age?
A rated age is the hypothetical age given to a person with a reduced life expectancy for purposes of pricing an annuity. The rated age reflects the life expectancy reduction of a seriously injured plaintiff. Even though the plaintiff may be a chronological 20-year-old, if he/she has a rated age of a 50-year-old it means that the life insurance company believes he/she has the same life expectancy and probabilities of survival as a 50-year-old. Annuity quotes will be based on this rated age and, thus, may significantly reduce the cost of a life annuity. Top
3. What can cause a reduced life expectancy?
Injuries, illnesses and other serious medical conditions may reduce an individual's life expectancy. The amount of the life expectancy reduction depends upon the severity of the health problem. Reduced life expectancy is common among people with spinal cord injuries, brain damage, heart disease, and cancer, among other conditions. A preexisting medical condition can also reduce the plaintiff's probability of survival. Top
Guaranteed Payments

1. What is a "guaranteed" or "certain" payment?
A "guaranteed" or "certain" payment (the terms are used interchangeably) will be made to the plaintiff while living and thereafter made to their heirs. In other words, the life insurance company must make the guaranteed payment on the due date whether or not the injured person is alive. Top
2. Does a "certain" or "guaranteed" payment cost extra?
Yes, but it usually costs very little extra. The exact cost of a guaranteed period will vary with each case. Often, it costs very little to guarantee the first 10 to 20 years of a lifetime payout. For example, the cost of $1,000 per month for life for 31-year-old female with no guarantee is $192,000. A 20-year guarantee period adds only $700 in cost. Top
3. How long should a "guarantee" or "certain" period be?
The guarantee period starts from the date the annuity is purchased. With lifetime monthly payments, the guarantee period is normally one-half of the plaintiff's life expectancy. For a normal lifetime payout, 20 to 30 years of guarantee are routinely given. The minimum guarantee period should at least provide payments equivalent to the cost of the annuity. Future lump sum payments are almost always "certain." Top
Have a question about structured attorney fees or punitive damages analysis?

Structured Attorney Fees FAQs

Punitive Damages FAQs