When Congress enacted the Periodic Payment Settlement Tax Act of 1982, the Federal Tax Code was amended to provide special tax treatment for certain types of settlement proceeds. Proponents for the change had recognized the need to offer financial protection for individuals involved personal injury and wrongful death settlements. The revision to the tax code allowed for claimants to place all or a portion of their settlement proceeds into a structured settlement annuity, and to receive the periodic payments 100% income tax free. But more than three decades later, are structured settlements still worth it?
Why would a claimant choose a structured settlement in the first place?
Settlement proceeds from personal injury and wrongful death cases are already 100% income-tax free, so why would someone want to place them in a structured settlement annuity? Here are a few of the main reasons:
Claimants can also opt to take some cash up front to pay for immediate needs, then place the rest in a structured settlement to preserve it for a longer period of time.
How do structured settlements stack up to traditional investments?
While the rate of return on structured settlements certainly isn’t what it was in the 1980s, there are a few key factors that allow them to produce returns comparable to traditional fixed-income investment vehicles:
Just to match the rate of return that a claimant would get with a structured settlement, a traditional investment would have to reach a higher rate of return. For instance, an individual in the 33% tax bracket who invested in a structured settlement with a 4% rate of return would have to achieve a 5.97% rate of return on a traditional investment. Why the big difference? Traditional investments often carry overhead fees, and any interest growth is taxable.
Contact us today to learn more about your structured settlement options
If properly planned prior to finalizing the settlement, structured settlement annuities can be a useful tool for creating long-term financial stability. To learn more about structured settlements, contact the Traci Kaas team at 800-354-2258 or firstname.lastname@example.org.
1Guarantees are subject to the claims paying abilities of the issuing insurance company.