Structured Settlement vs Lump Sum

Understanding Structured Settlements and Lump Sum Payments

A structured settlement is an agreement where the victim receives their settlement funds over time rather than all at once. The defendant purchases an annuity that pays out regular installments to the claimant over a set period of time. This type of payment plan offers financial security as there is a guaranteed income stream for years into the future.

In contrast, lump sum payments provide one large payment upfront instead of smaller amounts spread out over time, like with structured settlements. While this option provides immediate access to cash, it may not offer long-term financial stability if spent too quickly.

Periodic Payment Settlement Act (PPSA)

The settlement money or periodic payments method was introduced through the Periodic Payment Settlement Act (PPSA) passed in 1982 by Congress; This act provides an alternative option for individuals who receive damages from a lawsuit. Instead of receiving a large lump sum payment, plaintiffs can opt for periodic payments throughout their lifetime or for a specific time frame.

Structured settlement annuity payments have been provided to over 500,000 individuals injured since the year 1983.

Structured Settlement And Lump-Sum Hybrids

In some cases, plaintiffs may require immediate access to funds for medical bills or debt repayments. In such situations, waiting for periodic payments from their structured settlements can be challenging and frustrating. To meet these needs while still maintaining financial security over time, some individuals opt for a structured settlement lump-sum hybrid approach.

This option allows them to receive an initial larger amount as a lump sum followed by smaller scheduled payments over time guaranteed through their structured settlement agreement.

↳ How Does Structured Settlement Work?

1. The defendant agrees on a settlement amount with the plaintiff’s lawyer.
2. An annuity issuer purchases an annuity contract from an insurance company using some or all of those settlement funds agreed upon in step one above.
3. The insurance company then makes periodic payments directly to the individual receiving compensation according to the terms outlined in step two above until a full payout has been made.

↳ How Does Lump Sum Payouts Work?

If you choose to receive your funds through a lump sum settlement, the process is relatively simple:

• Determine how much money you want and/or need upfront.
• Work with your lawyer or financial advisor to negotiate with the other party on what amount they are willing to pay in exchange for releasing them from any further liability.
• Once both parties agree on an amount, typically, the defendant’s insurance company will issue one check directly payable to you.

Tax Implications

It’s important to note that receiving a large lump-sum payment can come with tax implications. The entire amount received may be subject to federal and state taxes depending on where you live and what type of settlement it was. It’s always best practice to consult with a tax professional before making any decisions regarding how much money should be paid out at once versus overtime via structured settlements.

↳ How Does A Structured Settlement Lump-Sum Hybrid Work?

When you choose this option with your insurer or annuity provider:

• You’ll negotiate with your insurance company or annuity provider on what percentage of your future payouts will be paid upfront as a lump sum.
• The remaining portion will then continue being distributed in regularly scheduled installments per the terms outlined in your original structured settlement agreement.

Pros And Cons – Structured Settlement vs Lump Sum

A structured settlement agreement is commonly used in cases involving personal injuries or workers’ compensation claims where large sums may be awarded but need to be distributed over time for tax purposes or better financial management. 

Advantages of Structured Settlements

• Tax benefits: When you receive money through structured settlements, this comes in a favorable tax treatment. In most cases, payments from a structured settlement are exempt from federal income taxes (IRC Section 104(a)(2)). This can result in substantial savings over time compared to receiving a taxable lump sum.
• Long-term financial security: Since payments are spread out over time, recipients have a guaranteed source of income that can provide stability and peace of mind for years or even decades into the future.
• Inflation protection: Some structured settlements include cost-of-living adjustments (COLAs) that help protect against inflationary effects on purchasing power.
• Budgeting assistance: Receiving regular payments can help individuals manage their finances more effectively by providing consistent cash flow without the temptation to overspend or make poor investment decisions associated with receiving a large lump sum.
• Credit protection: Payments received from structured settlements are usually exempt from creditors’ claims, ensuring continued support even during bankruptcy proceedings or debt collection efforts.

Disadvantages of Structured Settlements

• Limited access to funds: The primary drawback of structured settlements is that they may not provide immediate access to large amounts of money when needed. This lack of liquidity could be problematic if unexpected expenses arise or if better investment opportunities become available.
• Potential loss in value due to inflation: If your settlement does not include cost-of-living adjustments, the value of your payments may decrease over time due to inflation.

Advantages of Lump Sums

• Immediate access to funds: Receiving a lump sum provides immediate access to a large amount of money that can be used for any purpose, such as paying off debt, investing in real estate or other assets, or starting a business.
• Potential for higher returns through investment: With proper financial planning and investment strategies, individuals who receive money through lump sums may have the opportunity to grow their wealth more rapidly than those who receive structured settlements. This is particularly true if they invest in high-return assets like stocks or real estate.
• Fewer restrictions: With no limitations on how you use your funds from a lump-sum payout compared to some structured settlement agreements that may dictate specific uses for each disbursement (e.g., medical expenses).
• Simplified finances: Managing one large payment instead of keeping track of numerous smaller ones simplifies budgeting and financial planning processes.

Disadvantages of Lump Sums

• Tax implications: Unlike structured settlement payments, which are generally tax-free, lump-sum payments may be subject to federal income taxes depending on the nature and origin of the payment. This could significantly reduce the overall amount received by recipients after taxes.
• Risk of overspending and poor financial decisions: The sudden influx of cash from a lump sum can lead some individuals down a path of overspending and making unwise investments. Without proper budgeting and financial planning skills, it’s possible for recipients to deplete their newfound wealth quickly.

↬  Type of Structured Settlements

Different types of structured settlements exist based on the specific needs and preferences of the recipient. Some common types include:

1. Life Annuity: Payments are made for the duration of the recipient’s life, ensuring a guaranteed income stream regardless of how long they live.
2. Lump-sum payments with periodic installments: This type combines an initial lump sum payment followed by regular installment payments, providing both immediate financial support and ongoing income.
3. Deferred lump sums: In this arrangement, recipients receive one or more large payments at predetermined future dates rather than receiving smaller periodic payments over time.

↬ Structured Settlement Cases

A structured settlement agreement is often used in cases where the recipient requires long-term financial support due to disabilities, severe injuries with ongoing medical care requirements, and living expenses.

⇉  Disabilities

In some cases, individuals may receive structured settlements as compensation for disabilities they have sustained. These can include physical injuries that limit mobility or cognitive impairments that affect their ability to work and earn income.

⇉  Guardianships

Structured settlements can be set up through guardianships to provide financial support for minors or adults who are deemed incompetent. This ensures that the funds are managed responsibly and distributed according to their needs.

⇉  Workers Compensation

If someone gets injured while on the job, they may receive workers’ compensation benefits as part of their recovery process. Structured settlements can provide these benefits over time instead of receiving them all at once as a lump sum payment.

⇉  Wrongful Death Cases

In wrongful death cases involving surviving family members needing income support after losing a loved one due to another party’s negligence, structured settlements offer reliable sources of income over extended periods without having tax implications associated with traditional annuity plans.

⇉  Severe Injury Requiring Long-Term Medical Care Requirements & Living Expenses

The most common reason people opt for structured settlement plans is when there’s been significant injury requiring long-term medical care requirements & living expenses such as rehabilitation costs which can be very high. In such cases, structured settlements provide regular payments to cover these expenses over time rather than receiving a lump sum payment.

↬  Lump Sum Cases

Lump sum settlement comes in various forms depending on their origin and purpose; here are some common examples:

1. Legal settlements: When parties involved in a lawsuit reach an agreement, they may opt for a lump-sum payment to resolve the dispute quickly and avoid ongoing legal fees.
2. Lottery winnings: Lottery winners often have the option to choose between receiving their prize as a one-time lump sum or through periodic payments over several years (annuity).
3. Pension payouts: Retirees can sometimes elect to receive their pension benefits as a single large payout instead of smaller monthly payments throughout retirement.
4. Inheritance: Beneficiaries who inherit assets from deceased individuals might receive them in the form of lump sums depending on how estates are structured and distributed.

Selling Your Structured Settlement Payments For A Lump Sum Payment

If you have already received your structured settlement but now require more immediate funding, selling your future payments could be beneficial. Companies such as Fairfield Funding purchase these types of agreements offering you access to cash sooner rather than later while taking care of any legal fees associated with transferring ownership rights from yourself onto them so they can make payments instead of the original issuer.

It is important to note that selling your annuity payments or selling your structured settlement payments for a lump sum payment will likely result in receiving less money than if you had waited and received all scheduled payments. However, this option may be beneficial if you need cash quickly or want to pay off debt.

Who Can Buy Your Payments?

Finding a trustworthy company that specializes in purchasing structured settlements and annuity payments is crucial for ensuring a smooth transaction. Reputable buyers like Fairfield Funding have 15 years of experience in helping individuals sell their future payments while providing excellent customer service throughout the process. When researching potential buyers, look for companies with positive reviews from previous clients, a strong industry reputation, and transparent fee structures.

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