In cases of personal injury, when the resolution occurs, there are several options for the settlement. Two of these options include a structured settlement or a lump sum payout. Both options have advantages and disadvantages, and the right choice entirely depends on the plaintiff’s specific circumstances and their confidence in their money management abilities. Learn more about the differences between a structured settlement vs. a lump sum payout.
When an injured party wins a settlement as the result of a lawsuit, it doesn’t necessarily mean their struggles are over. How to responsibly budget and spend their new settlement monies poses a challenge, but—depending on the type of case and the plaintiff’s individual circumstances—a structured settlement may be the answer. What is a structured settlement? In today’s blog post, we provide a full overview to help you learn more about these financial plans, how they work, and how they can benefit you.
What is a structured settlement?
A structured settlement is a tool for parties who receive a settlement from personal injury, workers compensation, or wrongful death lawsuits. It allows the injured party to receive their settlement award as a series of payments over time rather than as a lump sum given to them all at once. Structured settlements protect injured parties from irresponsible financial decisions that may waste the settlement sum, while also enabling them to plan strategically for their future.
How does it work?
With a structured settlement, you have the flexibility to create a solution that works best for you. Proper settlement planning will provide for both you and your family’s immediate and future needs. You can take a portion of your settlement up front for current expenses, or you can set some or all of it aside to cover later expenses. Depending on the total of your settlement, you can divide it as a monthly or yearly income, set amounts aside for large expenses like a new car or mortgage, or delay payments until retirement. You want to design your structured settlement payouts to work for you and your family’s specific needs.
Benefits of a structured settlement
Receiving your compensation as a structured settlement has many benefits. First and foremost, this process takes away the stress of having to maintain and budget the large lump sum you would otherwise receive. This offers a great way to plan for future life expenses, such as college tuition or retirement. Payments from structured settlements are also entirely tax free—lump sum cash settlements, in contrast, come with taxable interest. These payments also create a guaranteed, long-term income, which can make it easier to provide for you and your family now and down the road.
A structured settlement is a money management tool for parties that receive settlement monies from personal injury, workers’ compensation, or wrongful death lawsuits. Structured settlements entail the defendant or their insurance company paying the sum of the settlement in to a fund. The administrators of the fund are then responsible for disbursing the payments to the plaintiff according to a pre-determined payment schedule over a set period of time. Structured settlements are very customizable. The plaintiff can negotiate how often he or she will receive payments, if the amount will stay stagnant or fluctuate based on anticipated needs, what happens to the payments in the event the plaintiff dies prior to the last payment, and more.
Money from personal injury cases is generally not taxable, but the earnings from investments made with settlement money would be. Structured settlements can help one avoid additional taxes and better budget their money.
What is a lump sum payout?
A lump sum payout is when, at the conclusion of settlement negotiations, the defendant or their insurer issues a check to the plaintiff in an agreed-upon amount. Once the check is cashed or deposited, the settlement is over.
What should one consider when choosing between a structured settlement and a lump sum payout?
It’s important for the plaintiff to consider their current and future needs before deciding whether to ask for a structured settlement or for a lump sum payout. They should also consider discussing the choice with a lawyer or settlement planning consultant. Here are some of the main things to consider.
Impending expenses
One major consideration to take into account is impending expenses. If one has a large expense coming up soon, such as tuition, a mortgage down payment, or sizable medical bills, he or she may want to opt for a lump sum payout to help cover those costs. Another option would be to consider setting up a structured settlement to have larger payments up-front and decreased payments toward the end of the payment period.
Personal financial history
If the plaintiff doesn’t have experience managing large sums of money, or if they’re new to investing, a structured settlement might be best. Many plaintiffs overestimate their ability to budget and manage money, and they end up spending their entire settlement in less than five years. If the plaintiff is quick to spend or has a bad track record with saving, a lump sum payout could be devastating to their financial future.
Other considerations
If the settlement is less than $150,000, a lump sum payout is most likely the best option—structured settlements don’t become as important or beneficial until a certain dollar amount is met because the tax benefit is connected to the amount originally structured. One should also consider that if the insurer that handles the payments files for bankruptcy, then the entire settlement will be lost.
If you are involved in a personal injury lawsuit and would like to discuss your settlement options with one of our experienced consultants, please let us know. We help attorneys and their clients navigate processes related to trust administration, government benefits planning, deferred and structured attorney fees, workers’ compensation claims, and much more.
