Imagine this scenario in your head: ” You are driving your brand-new car at 70kmph on a highway. The place is scenic with a view of hills and lakes. It is morning time, and the traffic is nil. You are enjoying the view and driving lazily. You didn’t notice the older woman walking on the side of the road, and at a turn, you just crashed into her. She falls unconscious and is carried to the hospital. She has a permanent leg injury making her handicapped, and she sued you in a court case.
What will you do? Opt for a way to not go to court. Because going to court will smear your reputation as a newly graduated student from a reputable university. You know you are wrong, but you can’t afford to fight the case, appoint a lawyer, etc. It’s too costly. Here comes the solution: going for structured settlement.
In the case of Structured Settlement, the defendant must be willing to pay insurance or regular payments periodically to the older woman and avoid the case going to court. It is a win-win for both parties.
The law allows Structured Settlement to be negotiated by both parties. The compensation is tax-free, i.e., payments to take care of the injured person don’t attract taxes. It is not possible for all types of cases. Only a few cases allow it, for example:
- Car or vehicle accident
- Workplace accidents
- Illness or injury
Some Benefits To The Victim That is Granted By The Law are:
- The victim can name a beneficiary as the receiver. It is very logical. Due to the accident, the victim has lost so many things such as body parts or way of living, and it affects not only him but his family. So, a recipient that avails the benefits of settlement is making good the loss caused by accident.
- They are recognized as financial assets that can be sold for money without any major tax implications if the victim faces a financial crunch in the future (medical expenses, loss of business, home purchase, etc.)
- They are not affected by the fluctuations of the market. They are fixed payments once approved by the judge.
Some of the Disadvantages are as Follows:
- As the amount is fixed, it cannot be changed. Maybe the victim needs more money than estimated, which can be the case, but it is impossible.
Some parts are not tax-free, like attorney fees.
- While selling the settlements as financial assets, there is a need for permission from the judge.
- The beneficiary is to be appointed after checking he is eligible to receive the settlement on behalf of the victim.
How Does it Work?
How do structured settlements affect the financials? Well, it is a tax-free payment done by the plaintiff to the defendant.
It is Done as Follows:
- If the plaintiff wins (in our case, the older woman) and demands a structured Settlement, the defendant has to appoint an assignee and set up an amount for structured settlement.
- The assignee will work with the life insurance company.
- The life insurance company will pay the amount of settlement to the victim as decided. (In lump or annuity)
- From the viewpoint of the victim and the giver, the money paid /received is to be made keeping in mind the following points:
How Much to Receive?
Negotiating whether the amount is paid in a lump sum or instalments. If they are paid at once, the victim may spend them at once, resulting in a financial crunch once again.
If the victim invests that money in the financial or stock market, then the rewards like interest or dividends can be taxed. If the victim faces too many initial expenses early on then, he can opt for this scheme. He can decide to opt for an instalment for a specific while and lump sum later on. All of this depends on his circumstances and his decisions.
If they are paid a lump sum, the present value of the future payments is to be calculated and paid, taking into account the inflation and interest rate. Similarly, for instalments, the future value of the instalment amount adding up the inflation and interest is calculated.
Therefore, it is a good way of paying workers for any major workplace injury instead of higher wages and additional medical costs. This way is legalized and offers a more legal way to settle the cases.
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