In a civil case, people are forced to pay money to right wrongs. Instead of writing a check, the person who is at fault will put the money towards annuities from life insurance companies. The annuity contract contains details about the series of payments that the victim will receive from the company.
However, most civil case settlements are paid in lump sums. The two key things that separate structured settlements from lump sum payments are taxes and term securities. Because money is structured over a longer time, structured settlements offer better guarantees than single payouts because these can be spent quickly.
Why do people receive structured payments?
Personal injury cases – this is a case where a person has been harmed and files lawsuit seeking money from the negligent party. When money is given in the form of structured payments, it will help you to pay for your medical bills.
Worker’s compensation – in this case, a worker receives money if he/she gets hurt on the job. The payment can be used to pay for medical bills or as wage replacement as you recover from your injuries.
Wrongful death – structured settlements can also be used to compensate people who have lost a family member through wrongful death. Your family is entitled to get tax-free payments to substitute the income that the deceased was contributing.
Structured payment options
The people who receive structured payments can choose from several options when it comes to receiving their award. The options include:
- Receiving the whole amount in equal payments over a specific time
- Receiving the whole amount in unequal payments over the same period, the payment can either increase or decrease with time
- A lump sum payment after annuity is awarded
Pros and cons of structured settlements
A structured settlement is suited for different types of cases. However, once the terms are in place, you cannot change them. Because of this inflexibility, some people choose to sell payments to structured settlement companies that buy and sell.
- If the recipient dies prematurely, the heir of the contract can keep receiving payments
- Structured settlement payments are usually tax-free
- A structured settlement usually yields a bigger payout because the annuity’s interest may earn over time
- Payments can take place over any length of time
- Spreading out your payments over time reduces the temptation to make large purchases, which guarantees future income. This works to your advantage if you have an injury that requires long-term care.
- Unlike bonds, mutual funds, and stocks, a structured payment does not depend on fluctuations of the financial market. The insurance company that issued the annuity will guarantee your payments.
- Once you finalize the terms of your contract, little can be done to change them even if they do not meet your needs. If your financial situation changes, you cannot renegotiate the terms.
- Some parts of the settlement can be taxed: punitive damages and lawyer’s fees
- Your funds cannot be accessed immediately even in the case of an emergency. Moreover, you cannot invest your lump-sum payout in investments that bring in higher returns.
- Tapping into your settlement before you sell payments will cost you
- Not all states need the insurance company to disclose their costs when establishing a lump-sum annuity or structured settlement.
Choosing between lump sum and structured settlement payments
The decision that you make will have long-lasting tax and personal consequences. For this reason, you need professional help when making the decision. You need to consider your tax obligations, financial skills, as well as planned large expenses.