Benefits and Drawbacks

As with any financial arrangement, there are benefits and drawbacks to structured settlements. Anyone with a serious injury who requires long-term medical care who is considering such a transaction should become familiar with the advantages and disadvantages of a structured settlement before entering into any sort of agreement.

Advantages

The advantages of a structured settlement over a lump sum payout are numerous:

The are Tax Free - As of the early 1980’s, structured settlements are tax free, both at the local and Federal level. Lump sum payments can be tax free, but the investment income generated by them is not. If you have concerns about taxes or having to keep up with tax matters caused by interest or investment income, then a structured settlement might be best for you.

They provide additional security - Many people who suddenly obtain large amounts of money, such as those obtained in a lump-sum payment as a result of a personal injury or accident, may suddenly find the world knocking at their door, as long-lost poor relatives, salesmen and con men are always interested in people who are suddenly flush with cash. This is not an issue with structured settlements, as the cash flow is steady but smaller. In addition, there are fewer worries about investing money, both in terms of where to invest it and in terms of whom to trust with the investments. The beneficiary of an annuity-based payment need not worry if a downturn in the stock market will affect their future health care needs, or worry if the investment advisor they hired is scheming to take all of their money.

They can save money - Settlements of this type are often arranged out of court, saving both parties the time and expense of accident litigation, which can often drag on for years with lawyers taking a large portion of any lump sum settlement. The costs of not going to court can be substantial, which leaves more cash available for the long-term care of the injured party.

They are flexible- Depending on the needs of the injured party, the payment period can be for five years, ten years, twenty years, or even a lifetime. If there is a recurring expense every two years, the payments can be structured to meet that every-other-year expense.

Disadvantages

The advantages of a structured settlement probably outweigh the disadvantages, but anyone considering such a settlement should also be aware of the downsides associated with them:

Structured Settlements cannot be changed - Generally, once you agree to accept an annuity, you cannot trade the annuity back for a lump sum payment. Structured settlements have special tax considerations. Once such an agreement is reached, you are stuck with it, for better or worse.

Structured Settlements do not pay interest - The interest is built in to the payments; that’s how an annuity works. On the other hand, the payments are tax free, and you can certainly invest any unspent portion of your payments and collect interest on that sum.

Long term payments may not be used as collateral for a loan - The laws that establish how these arrangements work are designed to protect the injured party from abuse. Placing the payments as collateral would place the financial agreement at risk, and that is not something for which they were designed. You may, however, declare your payments as income, and use that to apply for a loan.

This type of payment solution is not for everyone. If you want to pay cash for a big house using your settlement money, you may wish to take a lump sum payment instead. Once you agree to accept payments over time, you are obligated to continue. On the other hand, the amount of money you receive may be greater than if you accepted a lump sum payment, particularly if your payments are for life and you have the good fortune to live a long time.

You should see a qualified attorney if you are injured and are seeking compensation.