Structured Settlement Disadvantages
Choosing a structured settlement does involve certain trade-offs:
- Lack of Liquidity Once a structured settlement is established, claimants have no direct access to the funds. Assets intended to fund future payments will not belong to them, nor can they cash them in. Insulation from ownership of the assets is what makes the structured payments tax-free: the claimant must avoid “constructive receipt” or “economic benefit” of the funds in order to qualify for the tax advantages available under current Internal Revenue Code rules.
- Default Risk This is the risk that the party responsible for future payments will not pay on time or in full. Although default risk is not unique to structured settlements, their extra-long duration (many lasting 30, 40 or even 50 years into the future) makes management of this risk a priority.
- Limited Investment Choices Tax rules limit the universe of investment classes available for funding most structured settlements to two: government bonds and annuities purchased from state-regulated life insurance companies.*
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