Doug Hutchinson
Like lottery winners, recipients of large legal settlements can sometimes end up broke a few years after receiving a large sum of money. In many cases, people become bankrupt because they don’t have a financial plan.
A financial advisor can create a multi-year roadmap that takes into account:
- Current and future medical expenses
- Taxes
- Retirement
- Estate planning
- …and much more
We’ll start with an overview of structured settlements, split settlements and structured settlement annuities. Then we’ll explain why a settlement consultant is fundamentally different than a financial advisor.
What is a Structured Settlement?
A structured settlement is a negotiated settlement of a legal claim that allows the injured party to receive periodic payments over a predetermined period of time instead of receiving one lump-sum payout.
Structured settlements are increasingly popular. According to Forbes:
- Structured settlement proceeds reached $9.48 billion in 2024
- A 10% increase from 2023 and
- A 58% increase from 2022
What is a Structured Settlement Annuity?
Structured settlements can be customized to meet the cash flow needs of the recipient. The payouts are typically set up as an annuity where the injured party receives a certain amount of money on a predetermined schedule.
The at-fault party puts the settlement money into a custom annuity purchased from an insurance company that guarantees regular payments over time. That insurance company is now responsible for making the agreed-upon payments to the recipient at the cadence and over the time period laid out in the settlement agreement.
A structured settlement can have significant tax benefits. If the claim is related to a physical injury, the payments received are typically tax-free.
What is a Split Settlement?
Claimants commonly receive a split settlement: an initial one-time payment followed by a series of payments in the future. The up-front payment is typically used to cover existing costs such as legal expenses, medical bills and other debt.
Can You Sell Payments?
If the recipient unexpectedly needs a large infusion of cash, it’s possible to sell the stream of payments to a third party. This option is inadvisable, and we urge people to exercise extreme caution when going down this route.
- The third party typically pays much less than the total value of the future payments.
- Changes to the settlement require court approval and the legal and administrative costs will further reduce the net payout to the injured party.
With proper planning, hopefully this is something you never have to consider. More on this in a moment.
Settlement Consultants vs. Financial Advisors
A settlement consultant works with the injured party and their attorneys to customize a payout structure to provide long-term financial security to the recipient.
The settlement consultant is typically a commission-based insurance broker and is not necessarily a fiduciary. This means that they are not legally required to act in the best interest of the settlement recipient.
Moreover, the settlement consultant typically doesn’t know the recipient very well. In contrast, a good financial advisor will know a lot about your goals, struggles and hopes for the future.
It is critical for the injured party to also work with a financial advisor who is a fiduciary. The fiduciary distinction means the financial advisor is legally required to act in your best interests.
A Financial Advisor is on Your Side During a Structured Settlement Negotiation
A financial advisor, acting as a fiduciary advocate, can ensure the payment stream is a good fit for their client’s individual needs and long-term goals. The financial advisor can work with the settlement consultant to create a payment plan that accounts for:
- Living expenses
- Current and future medical expenses
- Income taxes
- Retirement planning
- Estate planning
- Future inflation
- Education costs for children or grandchildren
- Unexpected expenses
- Paying off current debt
…and much more.
While it is difficult to quantify the amount of money that a financial advisor can save someone, quality of life and peace of mind can be greatly improved by working with an advisor in addition to the settlement consultant. Someone who has just suffered a major, life-changing injury is likely to be emotionally overwhelmed and possibly ill-equipped to make major financial decisions.
Settlement consultants are typically salespeople who sell insurance products. For them, the settlement is a one-and-done transaction.
For financial advisors, on the other hand, this step is just one point along the client’s wealth of life journey. They will fight for you and help ensure you’re making smart financial decisions. In the years to come, they will check in and help you update your financial plan as needed.
The Importance of an Ongoing Relationship
A personalized structured settlement requires a deep understanding of the client’s medical condition and their current and future financial circumstances. Our experienced financial advisors are dedicated to helping our clients for the long term with detailed, customized financial planning. Now and in the years to come.
Questions? We’re here to help. Contact us online or give us a call at (415) 541-7774.
Related Reading:
- How to Leave a Meaningful Legacy
- What Is Goal-Based Investing and Is It Right for You?
- The Pros and Cons of Alternative Investments
DISCLAIMER:
Assembly Wealth (“Assembly”) is an SEC-registered investment adviser; however, this does not imply any level of skill or training and no inference of such should be made. The opinions expressed herein are as of the date of publication and are provided for informational purposes only. Content will not be updated after publication and should not be considered current after the publication date. We provide historical content for transparency purposes only. All opinions are subject to change without notice and due to changes in the market or economic conditions may not necessarily come to pass. Mention of a security should not be considered a recommendation or solicitation to purchase or sell the security, and any securities mentioned may be held by Assembly for client portfolios. Information presented represents an opinion as of the date published and should not be considered an investment recommendation. Assembly does not become a fiduciary to any listener, reader or other person or entity by the person’s use of or access to the material. The reader assumes the responsibility of evaluating the merits and risks associated with the use of any information or other content and for any decisions based on such content.
This material is provided for informational purposes only and should not be construed as legal, tax, insurance, or investment advice. Structured settlements and structured settlement annuities may not be appropriate for every individual or circumstance. Any discussion of tax treatment is general in nature and individual results will vary. Financial planning and advisory services cannot guarantee any particular financial outcome, and there can be no assurance that any financial objective or result will be achieved. Readers should consult their legal, tax, insurance, and financial professionals regarding their specific circumstances