Structured Settlements And Cash Flow

Written by Jacey Harmon
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When a person chooses to accept a structured settlement, they will receive periodic payments for a select period of time. This type of settlement is funded by an annuity, which guarantees the payments will be made. In essence, structured settlements create cash flow for an individual or family. Over time, financial situations may change and the cash flow may not be meeting the needs of the payee.

An annuity is an investment vehicle that is often used to supplement retirement funding, create an income stream, or in the case of structured settlements, to settle an insurance claim. There are two types of annuities available, fixed and variable. A fixed annuity is based on a fixed annual interest rate. The interest rate can change but never falls below the guaranteed minimum interest level. For example, a fixed annuity may offer a current interest rate of six percent with a guaranteed minimum of four percent.

A variable annuity is invested into the stock market. These annuities often allow for a person to diversify their annuity into several different asset classes. The performance of the annuity is not guaranteed and "varies" with the stock market. Variable annuities offer a "death benefit" that specifies that the highest historic account value will be paid if the account holder dies.

Structured Settlements and Cash Flow

Once an individual or family accepts a structured settlement, they are releasing the insurance company of any liability. In exchange for this, the insurance company provides a sum of money for the claimant in either a lump sum or structured settlement. Structured settlements can be paid in monthly, semi-annual or annual installments. Payments can be as short as one year or as long as 30 years. Once a settlement is reached, the periodic payment never changes for the length of the settlement.

That consistent cash flow can be a blessing when it is first accepted. The benefits are often not treated as taxable income and one knows that the money is guaranteed. However, a structured settlement may lose its luster after a while. Over time, the value of the money slowly declines due to inflationary pressures. Financial situations may change to the point that the cash flow no longer meets the needs it was intended to fill.

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