My personal injury attorney is encouraging me to take a structured settlement rather than a lump sum for a permanent injury. What is a structured settlement and why might it be better for me than a lump sum payment?

Most minor to moderate injury cases are settled with a lump sum payment to the injured party. More serious injuries, however, including those that require future treatment, or those resulting in permanent disability, are often settled with what is referred to as a “structured settlement”. You do have a choice. A structured settlement is a tool that is used to compensate the injured person with a moderate to large amount of money by way of payments over a long period of time rather than one large payment all at once. More and more claimants are choosing structured settlements.

Popularity of Structured Settlements

Tax Free Income

Most structured settlements come in the form of an annuity, which is sold by a third party, often, a life insurance company. Sometimes they are invested in U.S. Treasury Securities. Annuities (and treasury securities) grow the money, but are completely tax-free both at the state and federal levels. They actually work to expand the size of your total recovery. Not so with a lump sum of cash. The sum itself is tax-free, but for any investment you make, the proceeds (dividends, interest) will be taxed by both your state and the federal government. Over time, you will end up with more money if you take a structure, than if you take a lump sum. (See example below)

Flexibility

In addition, structured settlements can be very flexible. Suppose you have some large medical bills that need to be paid right away. You can structure your annuity to pay the bills directly or pay a large sum to you up front to cover the bills, with the balance of the money paid out to you over a set number of years (Designated Period Annuity) or for the rest of your life (Life Annuity). Or, if you know you have a large expense coming up in a year or two, you can design it so that you get small payments now, a larger sum a year from now, and then return to small payments for the balance.

There are many different options. Structured settlements are a low risk way of investing your money (many are government insured) and the payments are predictable–no surprises.

What’s the downside?

Probably the biggest negative is that once you agree to a structured settlement and “sign on the dotted line,” there is no way to change it. You cannot decide down the road that instead of payments, you want all the money. You cannot change the payment schedule, the amounts per payment, the frequency, the term, or anything else about the settlement. Additionally, if you want the annuity that is paying those predictable payments to somehow keep up with inflation and give you a cost of living increase from time to time, it will not, unless that was built into the payment schedule at the outset with a specific figure.

As indicated above, structures are low risk, but they are not risk-free. If the entity responsible for making the payments goes belly-up, there is the potential risk of losing the unpaid balance of your money. One other important factor is that unless the funds, as you receive them, are placed in a qualifying protective vehicle, such as a custodial account, you could be barred from receiving certain public benefits down the road, like Medicare and Medicaid. (Consult an accountant or a financial advisor for this information.)

Example

Suppose you have to make a choice between a structured settlement and a lump sum. Notice the difference in the total after 10 years. These figures are just examples and are hypothetical and unrelated to any particular settlement or case.

Lump Sum of $75,000

$25,000 fee to attorney

$20,000 paid to medical providers.

Of the $30,000 left, you put $10,000 in your checking account, which earns no interest, and $20,000 in your money market account, which is paying 5% interest.

If the interest is compounded daily, you will have $20, 524 after a year

After 10 years, you will have about $33,000

You will pay taxes on the dividends in an amount that is determined by your tax bracket.

Structured Settlement

Your attorney is paid his fee up front by the insurance co.

Your medical bills are paid up front by the insurance co.

The insurance company offers to purchase an annuity for 25,000

The structure you agree to provides you with payments of $600 a month for the next 10 years (total of $72,000)

You pay no taxes on this income.

Case Studies: Structured Settlements vs. Lump Sum Payments

Case Study 1: John’s Permanent Injury

John, a victim of a permanent injury, faced a decision between a structured settlement and a lump sum payment. He chose a structured settlement, which provided him with a moderate amount of money over an extended period of time.

This allowed him to receive tax-free income through an annuity, ensuring the growth of his total recovery. John appreciated the flexibility of structured settlements, as he could allocate funds for immediate medical bills while receiving regular payments to cover ongoing expenses.

The predictability and low-risk nature of structured settlements made it an attractive option for John.

Case Study 2: Sarah’s Financial Security

Sarah, who suffered a severe injury requiring long-term treatment, opted for a structured settlement. By choosing this payment method, Sarah secured tax-free income through an annuity or U.S. Treasury Securities.

Unlike a lump sum payment, Sarah’s structured settlement provided her with consistent and predictable payments, protecting her from financial uncertainties. Sarah’s structured settlement also offered her flexibility in handling expenses. She received smaller payments initially to cover immediate needs, with larger sums allocated for future expenses.

Case Study 3: David’s Long-Term Benefits

David faced a choice between a structured settlement and a lump sum payment following a permanent injury. Considering the long-term benefits, he decided on a structured settlement. With a structured settlement, David had the advantage of tax-free income and the potential for the money to grow over time.

He received regular payments that allowed for financial stability and met his ongoing needs. Although the inability to make changes to the settlement was a downside, David valued the security and reliability of structured settlements.