What is a Structured Payment Plan?

Structured payment plans are a type of settlement agreement where the payments are made in installments over a period of time, rather than as a single lump sum. This type of plan is often used in personal injury and wrongful death cases, where a large settlement or judgment is awarded to the plaintiff, but it can also be used in other types of cases such as employment disputes, divorce settlements, and lottery winnings.

How Does a Structured Payment Plan Work?

When a structured payment plan is established, the responsible party (usually an insurance company or the defendant in a lawsuit) purchases an annuity from a life insurance company. The annuity is then used to make the scheduled payments to the plaintiff or claimant over the agreed-upon period of time.

The amount and frequency of the payments are determined by the terms of the settlement agreement, and can be customized to suit the needs of the recipient. For example, if the recipient is a minor child who has incurred a permanent injury, the structured payment plan may provide for smaller payments during their childhood, with larger payments starting at age 18 to help with college expenses and the transition to adulthood.

One of the advantages of a structured payment plan is that it offers a guaranteed income stream to the recipient, which can help with budgeting and financial planning. In addition, the payments are typically tax-free, which can result in significant savings over time.

Why Choose a Structured Payment Plan?

There are several reasons why a plaintiff or claimant may choose a structured payment plan over a lump sum settlement:

Financial planning: Because the payments are spread out over time, it can be easier to budget and manage expenses.
Tax-free payments: Structured payments are typically tax-free, which can save the recipient a significant amount of money over time.
Guaranteed income stream: With a structured payment plan, the recipient knows exactly how much money they will receive and when they will receive it.
Protect against overspending: A lump sum settlement may be tempting to spend quickly, while a structured payment plan encourages responsible spending and financial management.
Medical expenses: If the recipient requires ongoing medical care or treatment, a structured payment plan can ensure that funds are available to cover those expenses over time.

What Are the Risks of a Structured Payment Plan?

While structured payment plans offer many benefits, there are also some risks to consider:

Inflation: Because the payments are spread out over time, they may not keep up with inflation. This could result in the recipient receiving less purchasing power over time.
Market fluctuations: Depending on the terms of the annuity, the payments may be affected by market fluctuations. If the insurance company investing the funds for the annuity experiences financial problems, it could affect the payments to the recipient.
Limited control: Once a structured payment plan is in place, it can be difficult to make changes. For example, if the recipient needs a large lump sum for an unexpected expense, they may not be able to access those funds without expensive penalties or fees.
Limited flexibility: If the recipient's needs or circumstances change over time, there may not be much flexibility to adjust the payment structure of the plan to meet those needs.

Conclusion

A structured payment plan can offer many benefits to a plaintiff or claimant, including financial planning, tax-free payments, and a guaranteed income stream. However, there are also risks to consider, such as inflation, market fluctuations, limited control, and limited flexibility. It is important to weigh these factors carefully when deciding whether a structured payment plan is the right choice for your situation.