Structured settlements have become a popular option for plaintiffs in personal injury cases over the past few decades. With a structured settlement, the plaintiff receives periodic payments over an agreed-upon schedule to resolve a personal injury claim rather than accepting the full settlement amount as a single lump sum. This provides long-term financial security.
However, structured settlements may also include lump sum payments as part of the overall payout schedule.
Structured Settlement – An Injury Settlement
A structured settlement is a customized payout schedule that provides injury victims with settlement funds over time through a series of scheduled payments. These future payments often come from a structured settlement annuity purchased by the defendant’s insurance company. The annuity provider then assumes responsibility for making the recurring payments according to the settlement terms.
Structured settlements first emerged in the 1970s as an alternative to lump-sum settlements. They gained popularity because they offer tax benefits compared to lump sums. Structured settlements also provide long-term financial security for plaintiffs with ongoing medical needs or reduced earning capacity.
Pros of Structured Settlement Annuities
There are several potential benefits of structured settlements versus taking a lump sum payout:
- Tax-free income
Structured settlement payments are generally tax-free under the Internal Revenue Code. Any interest earned also avoids taxation. Lump sum investments may generate taxable income.
- Regular income for life
Settlements can provide guaranteed income for life to cover long-term medical care or living expenses. This offers financial security.
- Avoid spending pitfalls
Getting a large lump sum could tempt some people to spend irresponsibly. Structured settlement payouts spread funds out responsibly.
- Custom scheduling
Settlement schedules can be tailored to individual needs, with larger payments for anticipated major expenses.
- Resistance to pressure
Family or friends may pressure injury victims for money if they receive a windfall. Structured settlements provide a built-in reason to resist such demands.
Including Lump Sums in Structured Settlements
While structured settlements commonly involve only recurring annuity payments, they can also incorporate lump sum payments in certain situations as per the terms of your settlement. There are a few ways lump sums may be included:
Upfront Lump Sum
Some settlements start with an initial lump sum payment, followed by smaller scheduled annuity payments over time. This provides immediate funds to pay pressing expenses related to the injury, such as medical bills or modifying a home for accessibility.
Milestone Lump Sum
Larger lump sum amounts can be scheduled at major life milestones, such as a child’s college graduation or a plaintiff’s retirement date. This flexibility adds funds when they are most needed.
Final Lump Sum
After all periodic payments are complete, the settlement may include a final one-time lump sum payout. This can help provide income during old age!
Emergency Lump Sum
Some settlements allow plaintiffs limited access to additional lump sum funds in case of a financial emergency or unexpected medical costs. These may be subject to restrictions.
There are few legal restrictions on incorporating lump sums into structured settlements as long as both parties agree on the terms during settlement negotiations. Adding lump sum flexibility is becoming more common.
Benefits of A Lump-Sum Payment
Allowing some portion of the settlement as one large payment can offer plaintiffs several advantages:
- Access to immediate funds
A lump sum can provide money right away for significant expenses, avoiding the need to wait for periodic payments. This is especially helpful for costly medical treatment or procedures not covered by insurance.
- Flexibility in meeting needs
Lump sums allow plaintiffs some flexibility in utilizing the funds for pressing needs at their discretion. Periodic payments alone may not cover a sudden, urgent expense.
- Serves as an emergency fund
Having access to a lump sum amount can provide security in the event of an unanticipated financial crisis. Periodic payments may not help in an emergency.
- Opportunity to invest
Some plaintiffs may want to invest a lump sum from their settlement to potentially achieve greater returns than the annuity alone would provide. This allows some control over the funds.
- Locked into payments
Once a structured settlement contract is signed, plaintiffs lose the ability to change the scheduled periodic payments. A lump sum provides more flexibility.
Disadvantages of Lump Sums
While lump sums in settlements can be beneficial in some situations, there are also a few cons or downsides to consider:
- May encourage wasteful spending
Some plaintiffs may be tempted to spend the lump sum irresponsibly instead of using it wisely for needs related to their injury. Large sums require discipline.
- Reduces total annuity payments
Insurers may decrease total periodic payment amounts in a structured settlement if they also provide lump sums upfront or at milestones. This should be evaluated closely.
- Tax implications if spent
While structured settlements enjoy tax-free status, plaintiffs may lose this benefit and incur taxes if they spend lump sum amounts instead of investing them. Professional tax advice is critical.
- Pressure from creditors
Plaintiffs receiving lump sums may be pressured by creditors to use the funds to pay off debts. This should be resisted to preserve money for future needs.
- Security risks
Lump sum recipients can become targets for thieves or scammers who may try to swindle them out of their settlement money. Taking proper precautions is essential.
Factors to Consider Regarding Lump Sum Payments
Because the risks and benefits of lump sums will depend on each plaintiff’s unique situation, several key factors should be carefully weighed:
Plaintiffs must objectively evaluate whether they have the discipline to use a lump sum wisely versus spending it recklessly. Some people may benefit from only structured payouts.
Does the plaintiff have the knowledge and experience to potentially invest a lump sum prudently? Those with proven investing skills may derive greater benefit from a lump sum.
Age and Life Expectancy
Younger plaintiffs have longer time horizons to potentially invest a lump sum profitably. Older plaintiffs may be better served by annuity income.
Plaintiffs with ongoing health issues and expected high medical costs in the future may be better off prioritizing structured payments over lump sums. Good health may allow for lump sum investing.
Lump sums can assist parents in providing for their children’s future education costs or living expenses. Plaintiffs with no dependents may need consistent income.
Other Income Sources
Plaintiffs without disability benefits or a working spouse may want the security of structured payments over risky lump sum investing. Those with other income may be able to absorb some risk.
Defendants are less likely to agree to lump sums for plaintiffs who seem financially irresponsible or immature. Dependable plaintiffs have greater lump sum options.
Experienced legal counsel is invaluable when deciding whether to accept a lump sum payment in a structured settlement. An attorney can help negotiate the most favorable terms and protect the plaintiff’s interests. Financial advisors and settlement planners can also provide guidance on maximizing benefits based on the plaintiff’s needs and situation.
Customizing the Payout Schedule
One of the key benefits of structured settlements is the ability to customize details like payment amounts, intervals, length of time, and more. This flexibility also allows lump sums to be incorporated strategically where appropriate. Potential payment schedules could include:
- Initial lump sum for medical care and rehabilitation costs, followed by monthly payments over 20 years.
- Monthly payments for 10 years, with a lump sum at years 5 and 10 to cover college costs.
- Payments increase 3% annually for life to keep pace with inflation, with access to emergency lump sum funds.
- Lump sum if the plaintiff requires special medical equipment or modifications to their home.
- Lump sum upon successful graduation from a vocational retraining program, followed by scheduled payments.
There are countless ways to structure payments, including lump sums, to optimize the settlement. An experienced personal injury attorney can help negotiate these terms.
Consulting Trusted Personal Injury Attorney
Because settlement decisions are complex and critical to long-term financial well-being, consulting with trusted experts is highly recommended when lump sum payments are on the table.
- Work closely with your personal injury attorney – An experienced lawyer understands structured settlements and can help you negotiate a favorable settlement agreement with the best mix of lump sums and annuity payments.
- Talk to financial planners – Reputable financial advisors can provide guidance on how best to utilize lump sums based on your overall finances, investment experience, and risk tolerance. Their input is invaluable.
- Connect with settlement planners – Settlement planning experts help customize the payment schedule to match your specific needs and goals. They can incorporate lump sums at optimal times.
- Seek tax advice – Since using lump sums improperly can result in tax liability, get input from a tax professional on how to structure the settlement while preserving tax advantages.
With trusted guidance from the right experts, plaintiffs can make informed, smart decisions about whether to accept lump sum payments as part of a structured settlement.
Structured settlements provide valuable long-term financial security for plaintiffs with ongoing medical expenses and reduced earnings due to personal injuries. While structured settlements traditionally involve only recurring annuity payments, they can also incorporate lump sum payments in many cases.
Lump sum payouts give plaintiffs some immediate funds to cover pressing expenses and provide additional flexibility over time. However, lump sums also come with financial risks if used improperly.
Hence, we will advise you to consult an experienced personal injury attorney, financial advisor, tax expert, and settlement planner to customize the terms and determine if lump sums in your structured settlement make sense.
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.