Pros and Cons of a Structured Settlement
Published in Settlement on September 29, 2016.
Many personal injury cases never end up in the courtroom. The defendant recognizes his or her role in the incident and works with the plaintiff to reach a settlement. When a plaintiff agrees to a settlement, he or she agrees to stop pursuing legal action and the defendant offers fair compensation in the form of a lump sum or a structured settlement. Before you agree to any settlement, read this information about settlement structures.
The Difference Between Lump Sum and Structured Settlements
Lump sum settlements allow the defendant to provide the entire payment upfront. A structured settlement, on the other hand, allows the plaintiff to secure predetermined payments over a period of time. Unlike child support or spousal support, the defendant’s insurer will typically set up an annuity (a form of insurance) to pay the plaintiff.
Pros and Cons of Choosing a Structured Settlement
Each form of settlement has its benefits and drawbacks. To determine the right course of action for your settlement, talk with a personal injury attorney, a tax professional, and/or an accountant. Here are some of the general pros and cons of structured settlements:
- Pro: Access to tax exemptions or a deferral. Structured settlements may qualify for a tax exemption under the current tax code. Talk to a tax professional or attorney to learn more about which types of compensation are eligible for tax benefits.
- Con: Plaintiffs only have access to a certain amount of compensation at a given time. Unlike a lump sum payout, a plaintiff can only use the amount paid during a settlement pay period. To take out more than the agreed payment, a plaintiff may need to borrow against the annuity or pay a price to access the funds ahead of time.
- Pro: Some plaintiffs need not choose between a lump sum and a structured settlement. Depending on the case, a defendant may agree to pay a certain amount of the settlement up front and then pay the rest of it in the form of a structured settlement. This may provide the plaintiff with better cash flow after a serious accident.
- Con: Structured settlements are subject to economic fluctuations. In some cases, the payout from a structured settlement may change depending on the rate of inflation or other economic conditions, such as recession.
- Pro: An independent third party will ensure the plaintiff receives payment. Most annuities are protected under state laws. In other words, if you have an annuity, you will always receive some type of payment from the responsible party. If the third party fails to provide compensation, the plaintiff has the opportunity to file legal action to recover lost settlement payments.
- Con: Plaintiffs may not have the ability to invest their money as they see fit. Financially responsible individuals may receive more benefit from a settlement if they invest a lump sum amount themselves. The rate of return is often higher for traditional investments than annuities.
- Pro: A structured settlement can provide for a lifetime of need. After catastrophic injuries, a plaintiff may never have the ability to function normally again. A structured settlement may include a special needs trust to protect a victim’s right to care and support over a lifetime.
Both a lump sum settlement and a structured settlement offer plaintiffs positive benefits and a few drawbacks. One form of settlement is not necessarily better than the other, just different. Some insurance companies and third-party defendants may try to approach you with settlement terms before you have an opportunity to speak with an attorney about your situation. Never accept the terms of a settlement until you speak with an attorney and possibly a financial expert. Your own financial circumstances and your injury will largely affect which type of settlement structure works in your favor.
In other cases, going to trial may provide a better outcome. Remember settlements are designed to cover your past, present, and future needs associated with an injury. Your attorney will recommend the best course of action to secure fair compensation, whether that is accepting a settlement or taking the case to court.