Structured settlements have long been a valuable option for individuals receiving compensation for personal injury claims. These arrangements provide a steady stream of income for claimants, ensuring financial stability for years to come. However, as the financial landscape has evolved, so have the options available for structured settlements. One such option is the market-based structured settlement.
In this blog post, we'll explore the basics of a market-based structured settlement and delve into its benefits.
What Is a Market-Based Structured Settlement?
A market-based structured settlement differs from a traditional structured settlement annuity. In a traditional structured settlement, the defendant or their insurer funds a fixed annuity, which in turn provides periodic payments to the claimant over an agreed-upon period. These payments are fixed and guaranteed1.
In contrast, a market-based structured settlement allows claimants to invest a portion of their settlement funds in a market-related investment portfolio. If the investments perform well, the claimant or attorney may receive larger payments than they would with a traditional annuity.
Benefits of Market-Based Structured Settlements
Market-based structured settlements can offer significant advantages to claimants. These financial arrangements can be used as a standalone settlement tool or in combination with a structured settlement annuity.
There are many benefits when choosing a market-based structured settlement, including:
- Additional Growth Potential: One of the key advantages is the growth potential of market-based structured settlements. By investing in a diversified portfolio, claimants and attorneys can benefit from market returns. This potential for growth can be especially beneficial for individuals with a longer investment horizon.
- Flexibility: Market-based structured settlements offer flexibility in terms of investment choices. Claimants can work with financial advisors to tailor their portfolios to their specific needs and risk tolerance, allowing for a more personalized approach to financial planning. Market-based structured settlement providers also offer a range of model portfolios to meet the individual claimant’s/attorney’s risk tolerance.
- Tax Advantages: Market-based structured settlements can have tax advantages. Payments (including growth) are income tax-free for personal injury, wrongful death, and workers’ compensation cases. Payments are income tax-deferred for non-physical injury cases and attorney contingency fees.
Using Market-Based Structured Settlements in Combination with Annuities
A traditionally structured settlement annuity may still be preferred for claimants prioritizing guaranteed income and stability. However, combining both approaches can offer a well-rounded solution.
By structuring a settlement with a portion allocated to a market-based option and another portion to a fixed annuity, claimants can enjoy the benefits of both worlds. They offer the potential for growth, flexibility, and tax advantages while providing income security and a secure and stable income stream that has the opportunity for investment growth.
As with any financial decision, it's crucial for claimants, attorneys, and their advisors to carefully consider their individual circumstances and goals. Market-based structured settlements may not be suitable for everyone, but they certainly add a valuable option to the toolkit of settlement solutions. Whether used independently or in combination with fixed annuities, they have the potential to provide a brighter financial future for those who have experienced personal injury.
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1 Guarantees are subject to the claims-paying abilities of the issuing insurance agency.