Helpful information to consider before deciding how to accept your personal injury settlement.
After winning a personal injury case, most people are very eager to get their hands on the compensation they have waited so long to receive. However, the reality of the matter is that while taking a lump sum payment and receiving your entire settlement amount at once may feel great, it is not necessarily the best move from a financial perspective.
For most people, structured settlements are actually the best way to receive compensation in a personal injury case.
How Structured Settlements Work
With a structured settlement, you get a small check every month, rather than one big lump sum right after your personal injury claim is settled. This can be very helpful to individuals who may require ongoing medical treatment or lifetime nursing care following their injury.
In most cases, structured settlements are funded by annuities. You may be able to choose between a designated period annuity (that will pay out for a set number of years) and a life annuity (that will pay out for the rest of your life). Either way, you will end up receiving more cash from the annuity than you would have received from a lump sum payment. (Note that you are not receiving the extra cash from the defendant, but from the growth of your investment in the annuity.)
Typically, structured settlements are set up so that any money you owe your insurance company or doctors for your medical bills and your attorney for your legal fees is taken out first, before the annuity is purchased.
Biggest Advantage of a Structured Settlement
The biggest advantage of a structured settlement is that it provides an easy, low-risk, tax-advantaged way to invest your money. While you could theoretically take a lump sum, invest it yourself, and get a bigger return, you would likely be exposed to greater risk and you would have to pay capital gains taxes on any money you made off your investments. Income from annuities is tax-free.
Are There Any Drawbacks to a Structured Settlement?
The biggest drawback of a structured settlement is that you are giving up control of your money. Once the paperwork is signed, you cannot change the frequency or amount of the payments or exchange the annuity for a higher-paying investment. Of course, for some people this is actually not much of a concern at all—they are choosing a structured settlement precisely because they do not have the time or inclination to become an expert investor and handle their own money.
Another possible drawback of a structured settlement is that the company you bought the annuity from could fail. This is a very slim possibility, but it would result in the loss of any remaining unpaid balance in the annuity.
Making a Decision
Before making a decision as to how to accept your compensation, you may wish to consult a financial planner for more detailed advice.
