Minors and lump sums of cash just don’t mix. Young people tend to be very impetuous and really bad at budgeting. It’s understandable. Most minors don’t have a lot of experience with handling money. Still, that doesn’t mean that they shouldn’t receive what is legally owed to them from a wrongful death lawsuit or as a result of an inheritance.
What Is A Structured Settlement?
Structured settlements are annuity contracts – insurance policies with insurance companies. These special contracts guarantee a fixed periodic payment for a specified period of time, up to and including a person’s lifetime. In other words, an annuity pays a guaranteed monthly or quarterly income payment (sometimes, the annuity provides for annual payments) for a set number of years (i.e. 10 years) or for a person’s entire life – regardless of how long that person lives.
For example, let’s say a child’s parents died in a car accident. It’s an incredibly traumatic experience but the insurance company is paying for it, big time. Instead of giving the minor a lump sum of cash, the insurer sets up an annuity and sends payments to him when he reaches the age of majority. The insurer’s total payment amounts to $1 million.
The payments can either be scheduled for a set number of years, say 10 or 20 years, or for the entire life of the minor.
The Dangers Of Lump Sum Cash Payments
There’s an inherent danger in receiving cash for a settlement – especially if the recipient is a minor. It used to be that insurance companies would just send out a check to the minor’s parent or guardian. The problem with this arrangement is that the guardian might not preserve the funds in a way most beneficial for the child.
Instead of using the money for current or future medical expenses, or for the benefit of the minor, the guardian would spend the money on himself or unrelated expenses that don’t benefit the child. What a travesty. Eventually, the federal government stepped in on a number of cases where this was happening and decided that structured settlements would better preserve the money for minors.
The Benefits Of Structured Settlements
Structured settlements are extremely flexible and usually eliminate the need for a financial guardian. The insurer becomes the defacto guardian for the money, and it manages it prudently. Payments can be withheld until the minor reaches the age of majority. From that point on, the child can then receive monthly payments, periodic lump sums of cash triggered by specific life-events (i.e. graduation), and increasing or decreasing payment schedules based on current income needs and life stages (i.e. graduation, marriage, and retirement).
Structured settlements also eliminate the possibility of a spendthrift blowing through his inheritance or lawsuit money. It’s sad, but there are so many people out there that just can’t seem to manage money very well. Unpaid medical bills pile up, while the child-turned-adult goes on a spending spree, buying everything and anything except what the money was originally intended for.