Structured settlements have become increasingly common in resolving personal injury lawsuits. But what exactly are structured settlements, and are they the right choice for you? Here is an in-depth look at how structured settlements work and their major pros and cons.
Understanding Structured Settlements
A structured settlement funding company provides a customized schedule of periodic payments to the injured claimant instead of a traditional single lump-sum payment. The payments are tailored to provide long-term financial support and cover projected medical expenses.
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.
- An independent settlement planner designs a customized structured settlement schedule meeting your specific needs.
- The settlement is funded by the defendant buying an annuity policy, and paying out the scheduled periodic payments over time. An insurance company makes future payments.
- You receive tax-free structured payments tailored to provide income security and cover medical costs as they arise.
A structured settlement aims to provide reliable long-term support rather than an immediate lump sum you control. Payments are tax-free, and amounts can be increased to keep pace with inflation. It requires extensive financial planning based on your needs.
Now, let’s look at the advantages and disadvantages of structured Settlements:
The Potential Advantages
Here are the main reasons a structured settlement could be a good fit for an injury victim:
Guaranteed Tax-Free Income for Life
The payments from structured settlements are entirely income tax-free per U.S. law. This exempts a potentially significant portion of your settlement from being taxed, unlike a lump-sum payment. It enables more of your compensation to work directly for you.
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 Prematurely Blowing Through a lump sum
Statistics show many individuals who suddenly receive large sums of money spend it too fast and irresponsibly. Even the most prudent person can fall victim to this temptation. Receiving payment in periodic installments makes it much harder to prematurely exhaust settlement funds.
The restraint of structured payments forces fiscal discipline and ensures your compensation supports you long-term. It provides a stable lifetime income baseline you can’t outlive. This protects against making risky financial decisions with a windfall.
Financial Security for Future Needs
Structured settlements allow coordinating payments around anticipated future medical costs and other living expenses. Your attorney and settlement planner will account for your complete health prognosis and projected costs in tailoring payments.
This financial planning provides peace of mind about being able to afford long-term expenses. Lump-sum settlements lack this direct linkage to your needs. The payment structure gives certainty that future costs like medications, treatment, and household assistance will be covered as they arise.
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.
Risks Of Structured Settlement Annuities
Structured settlements can be very beneficial in the right circumstances but do come with certain inherent drawbacks:
Once a structured settlement schedule is finalized, it is extremely difficult to change. You have no flexibility to renegotiate terms, accelerate payments, or adjust amounts. This inflexibility can become problematic if needs or financial circumstances evolve.
With a lump sum, you control, and you retain the flexibility to use funds as changing situations demand. Structured settlements mean locking into fixed, inflexible payment terms for the long run.
Structured settlements do not provide access to any cash upfront. All payments are drip-fed incrementally over time. This lack of liquidity prevents taking cash advances in emergencies or unique situations.
The incremental periodic payments also cannot be converted to cash like a lump sum. It is very challenging to sell off or borrow against future structured settlement payments. This limits financing options.
Vulnerability to Inflation
Unless specifically structured to increase over time, periodic payments can lose real value due to inflation. Fixed monthly amounts may fail to keep pace with the actual rising living costs. This causes the buying power of payments to decrease over decades.
Lump-sum settlements allow persons to decide investments and returns. With structured settlements, you have no control over protecting payments against inflation.
No Investment Options
Because the settlement company handles investments, claimants cannot benefit from investing the lump sum themselves. This removes the potential upside of stocks, bonds, or alternative instruments. There is no opportunity to pursue growth by personally investing the funds.
You lose control over returns by committing to structured annuity payments. Higher investment returns lead to accumulating more assets over decades. This potential benefit is lost.
How Structured Settlement Payments Are Calculated
The amounts and duration of future structured payments depend on various factors:
- Your age, occupation, health, family status – anything impacting long-term needs.
- The extent of injuries and prognosis – are they short or long-term? Permanent or progressive?
- Projected medical costs like treatment, medication, equipment, and accessibility needs.
- Estimated living and household expenses adjusted for expected inflation.
- Money to support dependents in case of the claimant’s untimely death.
- One-time foreseeable big-ticket costs like modifying a home.
- Any upfront cash advance you need for urgent expenses before payments begin.
The settlement planner analyzes your specific situation through this lens to design a payment schedule providing optimal financial security tailored to your 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.
It is critical to carefully weigh priorities like liquidity, flexibility, investment control, risk tolerance, future earning capacity, dependents, and projected costs. Disciplined claimants comfortable with fixed, inflexible lifetime income may gain peace of mind and security through structured settlements.
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 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 objectively assessing the benefits and risks in relation to your unique situation. This helps ensure you make fully informed decisions, providing financial security and protecting your family’s future.
With large settlement sums at stake, getting unbiased expert legal advice is essential. An attorney helps you see all angles of lump-sum vs. structured options. They can negotiate a payment structure truly aligned with your long-term needs. Do not leave it to chance. Consult a trusted legal professional for guidance before finalizing any settlement.
Q: What are structured settlements?
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. They are often used in personal injury cases or other situations where a plaintiff is awarded a large sum of money.
Q: How are structured settlements funded?
A: Structured settlements are typically funded through an annuity contract purchased from an insurance company. The responsible party or their insurance company will make payments to 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. 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 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 taxability 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.
Bara is a seasoned expert in the structured settlement and annuity field, with a successful career in structured settlement factoring. Her experience spans prominent companies such as J.G. Wentworth, Peachtree Settlement Funding, and Liberty Settlement Funding, where she managed substantial marketing campaigns. Constantly updating her knowledge, Bara is committed to providing exceptional experiences and maintaining her position as a trusted professional in the industry.