Most employers have a general idea of how a structured settlement is used to settle workers’ compensation claims. At times, however, employers do not have a complete understanding of how a structured settlement actually works. While often cloaked in legalese, structured settlements are more straight forward than meets the eye and a valuable tool to incorporate into a claims management program.
Structured Settlement Is Periodic Payments Over Time
Simply put, a structured settlement is a series of periodic payments over an extended period of time to settle a workers’ compensation claim as opposed to a single lump sum to settle the claim.
The self-insured employer or the insurer can work closely with an experienced structured settlement broker to purchase an annuity from a life insurance company who assumes responsibility for making the future periodic payments. In the case of a qualified assignment, the employer or insurer is also able to remove the long-term financial liability from their books.
Benefits of Structured Settlement vs. Lump Sum
Structured settlements also offer several benefits that lump sum settlements of claims do not provide. This includes:
- Cost Effective & Win-Win Settlements: A structured settlement allows the self-insured employer or the insurer to settle the claim for a lower amount that what would be paid in a lump sum settlement. This is because the present value of a future stream of payments is lower than the total amount that will eventually be paid.
- Tax Sheltered Benefits: A properly crafted structured settlement [known as a qualified assignment] provides tax free income to the injured employee, as the payments, per Internal Revenue Service regulations, is considered compensation for the injury, not as earned income.
- Long-term Financial Security: The employee is guaranteed future periodic payments, usually monthly, providing a measure of financial security.
- Future Benefits: The structured settlement can be crafted in such a way as to plan for, and take care of, future financial needs of the claimant, such as college tuition, vehicle replacement, etc.
- Medical Payments: Frequently, the biggest barrier to the settlement of workers’ compensation claims is the unknown of future medical cost. A second structured settlement can be purchased to providing funding for all future medical care. This is frequently done in conjunction with a Medicare Set-aside Arrangement where the life insurance company pays future medical expenses as they are incurred.
- Prevention of Financial Mismanagement: It is estimated that 90% of the people who receive an injury settlement will have dissipated the entire amount within 5 years. A structured settlement eliminates the need for the employee to manage a large sum of money over an extended period of time.
- Lower Litigation Costs : Employers or their insurers do not have to go through the entire legal process to resolve the claim, as often occurs when injured employees have out-sized expectations of what they should be paid.
- Removal of Adversarial Relationship: Frequently, in long-term and large injury claims, the employee sometimes becomes distrustful of the insurance company. The injured employee no longer has to deal with the employer or claims professional when a structured settlement is completed.
Certainty of Settlement Amount: A structured settlement allows the injured employee to know what the total settlement amount will be. If the employee litigates the value of the claim, there exists uncertainly. For more information on structured settlements and how they can be used to lower your overall cost on your large claims, please contact us.
Author Michael B. Stack, CPA, Director of Operations, Amaxx Risk Solutions, Inc. is an expert in employer communication systems and part of the Amaxx team helping companies reduce their workers compensation costs by 20% to 50%. He is a writer, speaker, and website publisher. www.reduceyourworkerscomp.com. Contact: firstname.lastname@example.org.
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