Should You Take a Lump Sum or Structured Settlement Offer? Deciding whether to take a lump sum payout or structured settlement is one of the most important financial decisions you will make as a result of settling a personal injury claim. Yet it’s also one that many people do not spend nearly enough time considering. While a personal injury attorney will help you run the numbers, being aware of the tradeoffs involved before engaging in settlement negotiations will help you know what questions to ask.
How do Structured Settlements Work?
With a structured settlement, your agreed-to compensation is paid over time via a series of payments scheduled at intervals you define. They’re funded by an annuity purchased by defendant’s insurer. You can request payment amounts be disbursed in just about any configuration you and the defendant can agree upon.
Common choices include periodic payments of equal value; larger periodic payments every few years to cover the anticipated costs of major expenses like college education or medical care; or payments that increase in value to keep pace with inflationary expenses like medical care. Another advantage is that earned income from structured settlements is not taxed under federal law.
Why would you want a Structured Settlement?
The primary benefits of structured settlements are that they protect you from spending your compensation too quickly and they force you to be disciplined about budgeting. The largest windfalls run the greatest risk of being rapidly depleted. Between bad investments, pressure from family members, unexpected expenses and just “having more money than you’re used to,” it’s very easy for a lump sum settlement to run through the bank account of even extremely capable people within a few years.
Structured settlements protect you from yourself by preventing that from happening. If you know you’ll receive X amount of money every month for the rest of your life to cover your ongoing living and medical expenses, you won’t have to worry about budgeting spikes in uninsured costs.
Why wouldn’t you want a Structured Settlement?
Budgeting and restraint are not the norm for every injury victim, especially those who receive substantial awards. If you do not have expenses that span the entire time frame of your settlement payments, taking a lump sum will allow you to access all of your compensation immediately rather than waiting years to collect what you’re owed. It also allows you far greater flexibility with a large payout.
For example, if you have mountains of debt, need to renovate your home to make it accessible, or see an investment opportunity with the potential for a large return you may want all the money at once.
Keep in mind that life changes. If you structured your settlement but your needs change drastically later in life due to a second injury or a sudden change in your family you may need the flexibility to access all of your money quickly. That means you would need to pay to have your structured settlement “unstructured” through a settlement factoring company.
Making the Best Decision for You
It should be obvious that there is no right answer for everyone. The size of your settlement, type of injury, ability to responsibly handle a financial windfall, and whether or not you have loved ones who will rely on you for financial support are all factors that go into this decision. High settlements with catastrophic injuries that require expensive long-term care or leave the victim with a permanent disability are often partially structured to ensure the victim is taken care of for life.
Most back injury settlements fall into this category. Other injuries that involve costly, but one-time expenses may merit taking the money all at once. Discuss your options with your personal injury attorney in Palm Beach Gardens and consider consulting with a financial planner.