Inflation Adjustments in Structured Settlements: What To Ask For

Structured settlements are a popular choice for individuals receiving compensation from personal injury, wrongful death, or workers' compensation claims. Instead of receiving a lump sum, structured settlements provide a steady stream of tax-free payments over a specified period, offering income stability and security. However, economic fluctuations, particularly inflation, can significantly impact the real value of these payments over time. Understanding how inflation adjustments work in structured settlements is crucial for maximizing the benefits and mitigating potential drawbacks.

Typical Inflation Adjustments in Structured Settlements

Inflation adjustments in structured settlements are designed to preserve the purchasing power of future payments. These adjustments, often referred to as Cost of Living Adjustments (COLAs), increase the periodic payments by a certain percentage to keep up with inflation. For example, a structured settlement might include a 2% annual COLA, meaning that each year, the payment amount increases by 2% to account for inflation. This ensures that the recipient's income maintains its value over time, even as the cost of living rises.

Best Practices for Inflation Adjustments

One of the best practices for inflation adjustments in structured settlements is to include a COLA that accurately reflects the expected rate of inflation. This can be determined by consulting economic forecasts and inflation trends1. Additionally, it's important to review and adjust the COLA periodically to ensure it remains aligned with actual inflation rates. Another best practice is to work with a financial advisor or settlement planner who can help design a structured settlement that includes appropriate inflation adjustments and other financial protections.

Worst Practices to Avoid

One of the worst practices is failing to include any inflation adjustment in the structured settlement. Without a COLA, the real value of the payments will decrease over time, reducing the recipient's purchasing power. Another mistake is setting the COLA too low, which can also lead to a loss of purchasing power. Additionally, not reviewing and adjusting the COLA periodically can result in the adjustment becoming outdated and ineffective.

Case Examples

Consider the case of John, who received a structured settlement of $1.5 million after a personal injury. His settlement included an immediate cash payment of $300,000 and deferred payments of $1.2 million over 20 years. To protect against inflation, John's structured settlement included a 2% annual COLA. This adjustment ensured that his monthly payments increased each year, maintaining his purchasing power and providing financial stability.

Recommendations

To maximize the benefits of a structured settlement, it's essential to include an appropriate inflation adjustment. This can be achieved by consulting with financial experts and regularly reviewing the COLA to ensure it remains effective. Additionally, recipients should consider other financial protections, such as investing a portion of the settlement in inflation-protected securities or diversifying their investment portfolio to hedge against inflation.

Conclusion

Inflation adjustments are a critical component of structured settlements, helping to preserve the real value of future payments. By including an appropriate COLA and regularly reviewing and adjusting it, recipients can ensure that their income maintains its purchasing power over time1. Working with financial advisors and settlement planners can provide valuable guidance in designing a structured settlement that offers financial security and protection against inflation.