A set aside may be financed with a lump sum or structured settlement. The advantage to financing it with a structured settlement is that it typically reduces the amount that has to be set aside substantially. In addition, a structured settlement “rated age” can be used as evidence of reduced life expectancy which also results in a lower figure for the set aside. When a structured settlement is used to finance a set aside it operates similarly to a deductible. Each year a payment is made from the structured settlement annuity into the set aside, that payment (plus any accumulation from past years) must be spent down before Medicare will pay for services. Because structured settlements are tax-free and reduce the amount of the set aside dramatically, they should be considered in nearly every set aside arrangement.
The set aside can be financed with a single lump sum from the settlement proceeds or through future periodic payments using a “structured settlement”. Opting for a single lump sum funding simplifies the administration of the set aside, but requires setting aside a larger amount compared to periodic payments. Choosing to fund the set aside with future periodic payments through a structured settlement makes the administration more challenging, but it is a more cost-effective method. When a lump sum is used for funding, Medicare starts covering injury-related healthcare expenses as soon as the account is properly depleted. On the other hand, if the set aside is funded through periodic payments via a structured settlement annuity, it works similarly to a yearly insurance deductible. Each year, the structured payment is allocated to the set aside, and Medicare begins paying for services related to the physical injury once the funds are exhausted within that year. If there are remaining funds from the periodic payment at the end of the year, they carry over to the following year. Hence, Medicare only covers expenses once all funds for a particular year have been utilized.
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