A structured settlement is a financial agreement in which a claimant receives compensation through periodic payments over time rather than one lump sum. Structured settlements are commonly used in personal injury and medical malpractice cases to provide funds for long-term medical expenses and loss of livelihood.
As useful as structured settlements can be, they also come with certain limitations that must be considered. Here, we’ll look at the pros and cons of structured settlements to help you make an informed decision.
Let’s break this down step-by-step:
- You suffer an injury or loss through someone else’s negligence – like in a car accident. You have a viable personal injury claim.
- You file a personal injury lawsuit seeking compensation from the at-fault party. This defendant is often represented by their insurance company.
- Instead of offering you a lump-sum settlement, the defendant proposes settling through a structured arrangement of multiple future payments.
Structured Settlement Pros And Cons
Now, let’s look at the structured settlement pros and cons:
Advantages of A Structured Settlement Annuity
Here are the main reasons a structured settlement annuity could be a good fit for an injury victim:
✅ Tax Benefits
One of the biggest advantages of structured settlements is favorable tax treatment. Under a structured settlement for a personal physical injury, all payments received are income tax-free under IRS regulations (Internal Revenue Code 104 (a)). However, any interest earned on amounts invested could be subject to potential tax later, depending on the situation. Therefore, you must consult with a tax advisor regarding any tax implications.
✅ Guaranteed Income for Life
Another advantage of a structured settlement is providing guaranteed income for life, even in case of any disability. Life insurance companies use medical underwriting to determine payouts based on life expectancy. This ensures maximum benefits even if the beneficiary has health issues.
Structured payments are backed by annuities from established life insurance companies with high credit ratings. This provides guaranteed income security you cannot outlive. The income is highly reliable, unlike lump sums that could be mismanaged.
✅ Avoids Misuse of Funds
Lump sum settlements run the risk of being misused or depleted too quickly. Structured settlements benefit you by providing financial discipline through regular payments. This avoids wasting funds meant to cover long-term medical costs.
✅ Insulated From Creditors
As structured settlements are annuities rather than liquid assets, they enjoy legal protections from creditors and bankruptcy seizure in most states. This prevents settlement funds from being diverted away from supporting the claimant’s needs.
✅ Customized to Needs
Structured settlements can be customized to match income to future medical expenses and financial needs. Payments can be scheduled annually, semi-annually, monthly, or even in an advancing sequence.
✅ Protection for Loved Ones
Structured settlements can include guaranteed provisions for dependents and heirs. Payments benefiting children, a special needs dependent, or a partner can continue even after the primary claimant passes away. This ensures ongoing financial support protecting loved ones.
Many standard annuity payments end when the primary recipient dies. Structured settlements allow customization to provide for others long-term in case of untimely death. This can be invaluable for parents of young children.
Disadvantages of Structured Settlements
Structured settlements can be very beneficial in the right circumstances, but they also come with certain inherent drawbacks:
Lack of Flexibility
One of the biggest drawbacks of a structured settlement is payment terms cannot be altered once finalized. This prevents adjusting your income flow for unexpected expenses. Many injury victims are forced to heavily discount settlements to meet immediate needs, also called as “Selling Structured Settlements”.
Structured settlements mean locking into fixed, inflexible payment terms for the long run.
Vulnerable to Inflation
Since payments are fixed, they lose purchasing power over time due to inflation. What may seem sufficient initially can diminish substantially over decades. This may mean income is inadequate to meet long-term costs.
Reliant on Insurance Company Stability
While structured settlements have strong legal protections, there is some dependency on the financial stability of the issuing life insurance company. If the insurer were to go bankrupt, payments could be impacted.
Lower Rate of Return
Money received as a lump sum can be invested for capital appreciation. Under a structured settlement, returns are limited to fixed payments, even if market interest rates rise over time. There is an opportunity cost versus generating higher investment income.
The Hybrid Approach: Combining Both
Rather than an all-or-nothing decision between lump sum and structured settlement, many claimants opt for a hybrid approach. This could involve an initial lump sum to cover immediate medical expenses and rehabilitation costs, along with structured payments to provide long-term financial support. This balanced approach lets claimants customize settlements to meet both current and ongoing needs.
The Choice Depends on Your Situation!
As this overview conveys, structured settlements have both advantages and drawbacks. There is no universally right or wrong option. The suitability depends completely on each claimant’s unique situation and needs.
Younger victims with long time horizons may be better off investing a lump sum prudently. Those with dependents often benefit from guaranteed structured payments. There is no one-size-fits-all answer. Each option has merits depending on personal circumstances.
The best approach is to extensively evaluate your complete financial picture and priorities. Then, make the most educated choice, providing long-term benefits tailored to your needs and those of family members relying on you.
Contacting A Personal Injury Attorney
The decision of whether to accept a lump sum payment or a structured settlement periodic payment is very complex with long-term ramifications. It is wise to thoroughly discuss options with a personal injury attorney experienced in settlement cases. An attorney can provide invaluable guidance in assessing the benefits and risks in relation to your unique situation. This ensures you make fully confident decisions, providing financial security and protecting your family’s future.
FAQs
Q: What are structured settlement annuities?
A: Structured settlements are financial arrangements that are designed to pay out a settlement award over a period of years rather than as a lump sum settlement. They are often used in personal injury cases, especially those involving catastrophic injuries, pedestrian accidents, workplace accidents, or wrongful death, where a plaintiff is awarded a large sum of money.
Q: How are structured settlements funded?
A: Structured settlement annuity payment is typically funded through an annuity contract purchased from an insurance company. The responsible party or their insurance company will pay the injured party, who then receives ongoing payments from the annuity.
Q: Can structured settlement payments be sold?
A: Yes, it is possible to sell structured settlement payment rights to a third party, called a factoring company. However, it is important to carefully consider the financial implications and potential loss of future income before making this decision.
Q: What happens if the structured settlement recipient dies?
A: In the event of the recipient’s death, the structured settlement future payments may cease or be transferred to a designated beneficiary, depending on the terms of the settlement agreement.
Q: Can structured settlements be used to pay off debt?
A: Structured settlements are not typically designed to pay off debt. Their purpose is to provide a consistent stream of income to meet the ongoing needs of the recipient.
Q: Are structured settlements taxable?
A: The tax of structured settlement payments depends on several factors, including the nature of the claim and the specific laws of the jurisdiction. In many cases, the income from a structured settlement may be tax-free, but it’s important to consult with a tax professional for advice specific to your situation.
