If you win significant personal injury compensation, at trial or through negotiation, one important question is how the money is paid out.
You might opt to take all the money now in one lump sum. Or it may be wise to structure the settlement to be paid out over a number of years. Here’s a look at the pros and cons of structured settlements.
What is a structured settlement?
A structured settlement is an arrangement with the defendant’s insurance company to receive injury compensation over time. It is common when a lawsuit results in a large amount of money for a permanent or catastrophic injury, especially if the injured party will need future surgery or ongoing care. It is also common to structure settlements on behalf of a minor or a vulnerable adult. There are many ways to structure the proceeds, but the most typical is an annuity (a fixed annual payment for a certain number of years).
What are the advantages of a structured settlement?
- Dependable income – A structured settlement ensures a future revenue stream, in case the injury prevents the victim or caregivers from holding a job.
- Saving you from yourself – People who receive a lump sum payment often burn through the money in a few short years. When it’s gone, it’s gone.
- Saving you from others – A structured settlement cannot be raided by family members or “gold-diggers.”
- Tax strategy – Personal injury proceeds are generally tax-free. But certain elements, such as accrued interest, attorney fees or punitive damages, may be taxable. A structured settlement can anticipate or minimize tax ramifications.
- College financial aid – Settlements on behalf of a child can be structured to preserve eligibility for scholarships and grants.
- Stipulations – The money can be earmarked for specific things, such as medical expenses or college tuition, or set aside in a trust fund until a certain age of maturity.
What are the drawbacks?
- Less flexibility – With the structured annuity, you’ll have less money to buy a car, take a vacation or pay off debts. If you are elderly or ill, you may want to “live your life” while you can.
- Low yield – If you take a lump sum payout, you may be able to invest the money at a higher return than the interest rate earned on the “safe” annuity.
- Unexpected hardship – You won’t be able to access the money if you have a big financial setback such as job loss, divorce or other medical bills.
- Penalties for cashing out – There are companies that will pay cash for your structured settlement (unless the settlement language or the court does not allow this). However, they will take a big chunk of your money as their fee.
Consult with your attorney and financial professionals
There are countless ways to structure a settlement. For example, you could take part of the damages up front and set some of the money aside to cover future medical care. You may or may not need to worry about taxes on the proceeds.
The pros and cons of any settlement should always be discussed with a personal injury lawyer before signing anything. When an insurance company is eager to cut you a check, there is a good chance that they are trying to shortchange you. Your lawyer will also be able to recommend an accountant or financial planner if you do not have one, to make sure your long-term needs are met.