In most cases, personal injury plaintiffs who win or settle their cases often have two options regarding their settlement.
One, they can choose to take their settlements in a one-time lump-sum (all at once) and two, they can opt to receive regular payments (structured) over a certain period of time and in some cases, for the rest of the plaintiff’s life.
So basically, a structured settlement is a negotiated financial arrangement whereby a plaintiff agrees to resolve a personal injury claim by receiving part of the payment in the form of regular payments on an agreed schedule.
The settlement thus requires the claimant to discontinue any further legal action in exchange for the payments.
The settlement is particularly beneficial when the claimant suffers a serious and permanent injury that prevents him/her from obtaining a regular income or limits his/her mobility.
A structured settlement may actually provide the claimant with a substantial tax benefit since under the U.S. Tax Code, all Personal Injury Settlements are considered “tax-free.”
How Does a Structured Settlement Work?
With these settlements, instead of receiving a one-time lump-sum from the defendant, you instead receive regular payments over a certain period of time (usually a fixed number of years).
For example, if your settlement amounts to $300, 000, then the defendant may be required to make regular payments of say, $10, 000 for a number of years.
With this kind of settlement, the defendant’s insurance company typically funds an annuity policy¹ for the claimant. This is after the defendant places an annuity with their insurer and is considered as a more stable alternative compared to relying on the defendant’s corporations’ financial stability and health.
The plaintiff also has the option to design the settlement in a way that provides money when they need it most. Some of these options include;
- Receiving a large initial payment.
- Design payments to either increase/decrease over time.
- Delay payments, maybe until retirement.
- Additional amounts for immediate expenses such as medical bills, college tuition, debt repayments, including others.
Should You Opt for a Structured Settlement?
Opting for this kind of settlement is generally a good idea because;
- This form of settlement is considered “tax-free”.
- It offers the plaintiff the certainly of payments over a specific period of time.
- There is a guarantee that the payments will be made as most state insurance laws protect annuities.
- Parties may agree to combine a lump-sum payment with a structured settlement to pay for immediate expenses such as medical costs, rehabilitation costs, debt repayments, college fees…etc
- Both parties can decide to dedicate the payments from the settlement to cover future expenses such as drugs or advanced treatment. The annuities may also be tailored to cover the claimant’s specific needs and every other future demand.
As a plaintiff, it’s advisable to seek opinions with your personal injury attorney, a tax professional, a financial planner, or a certified accountant before accepting a structured settlement or practically any settlement agreement.
You will be able to make a more informed decision and most importantly, you will be in a better position to manage your finances more effectively and achieve your financial goals.
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