Get a free quote

People who successfully bring suit in a personal injury, wrongful death, medical malpractice, or other type of lawsuit, or who settle a worker’s compensation claim, often must make a difficult financial decision. Should they take the money as a lump sum or spread it out in a series of payments over a certain period of time, called a structured settlement? There are advantages and disadvantages to each approach, so one should weigh each option carefully before choosing, the Institute of Certified Financial Planners, Denver, Colo., cautions.
The majority of people who settle a civil lawsuit or worker’s compensation claim take a single cash payment, which may be the best choice in some cases. The victims may have accumulated significant medical debts, for example, that need to be paid off as soon as possible. They potentially can invest the money and earn more with it than if they had taken it in a series of structured payments. Moreover, if the recipient dies, heirs have access to the remaining lump sum, while structured settlement payments often stop at death.
There are risks to the lump-sum approach, though. Research has shown that most people spend a lump sum in a relatively short time. One study found that 25-30% of all accident victims spend their settlement within two months, and 90% do so within five years. Quickly running through a lump sum can be devastating, particularly if one will need the money for years or even a lifetime to pay for medical or living expenses. There also is the risk that the lump sum will be invested unwisely. Relatives or unscrupulous investment sales people may try to prey on a victim’s “wealth.” Whatever the reason, once the money is gone, it’s gone for good.
Structured settlements provide an agreed-upon series of payments over a specified period of time, which may be as long as the recipient’s lifetime. Payments typically are made through an annuity from an insurance company (be sure the firm is financially sound) or by a trust that invests in U.S. Treasury bonds. The total payments are designed to equal a lump-sum payment earning a particular rate of return over that specified period of time.
A structured settlement may be designed to pay out smaller lump-sum amounts in addition to regular monthly payments. It might provide an up-front amount to take care of accumulated medical expenses, then dispense lump sums at certain points later, such as when a child enters college or the recipient reaches retirement age.
Structured settlements reduce the risk that the recipient will squander the settlement. Periodic payments can be designed more easily to meet the recipient’s ongoing living or medical expenses. In addition, they provide a tax advantage over lump-sum payments. Although structured settlements and lump-sum payments generally are tax-free (there are some exceptions), the earnings from an invested lump sum are not (unless they are received from a tax-free investment such as municipal bonds).
However, there are disadvantages to structured settlements. Some may not be guaranteed for their full settlement period. Some structured settlements end at the person’s death. Finally, unlike a lump-sum payment, smaller periodic payments may not meet large unexpected expenses.
From USA Today

Comments are closed.