How Can a Claimant Manage the Disadvantages?
Lack of Liquidity
- They shouldn’t structure the whole settlement. They should set aside an amount of cash to provide liquidity for emergencies. Typical cash allocations run from 20% to 40% of the amount remaining after attorney fees, expenses, and liens.
- They can build in future lump sums. The delivery of large single-lump sums every five or 10 years can replenish spent reserves and provide future funds.
- In cases of true hardship, emergency funds may be secured in certain cases, subject to court approval.*
Default Risk
- They should diversify the fixed-income funding sources. Instead of placing the entire structure with one annuity issuer, they should split it up between two or three. That way, difficulties at one company will not jeopardize all future payments. (This may not be practical for small settlements but should be considered for those over $500,000.)
- On newer structures that include a "growth" option (portion of payments tied to performance of an investment fund), diversify between the variable growth and guaranteed fixed options. Unlike fixed payment streams, future payments tied to the performance of an investment fund are held in a “separate account"** for the benefit of the claimant, not as a deposit of the annuity issuer. Since these assets are not assets of the life insurance company, they are therefore unavailable to its creditors. This effectively eliminates default risk for that portion of the structured settlement.
Limited Investment Choices
- They must work with what available. The economic advantage of the tax benefit on structured settlements will outweigh its limitations in most cases.
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