After you’ve been awarded compensation in a personal injury lawsuit, you can choose to receive the award either as a structured settlement or as a one-time lump-sum payment.
If you opt for a structured settlement, you will receive periodic payments over a fixed number of months or years depending on the total amount. Once approved by the court, it’s administered to you by the insurance company settling the case.
You can also opt for a one-time lump-sum payment.
Of course, there are advantages and disadvantages to both approaches depending on individual financial circumstances. So it’s best to consult with your personal injury lawyer or financial advisor before settling on one.
That being said, let’s have a look at the pros and cons of both structured and lump-sum settlements.
Structured Settlement: Pros and Cons
- Structured settlements provide a guaranteed income over the period of the agreement.
- These types of settlements are protected by many states’ insurance laws, which provides you with assurance of the insurance company making the payments.
- Structured settlement are completely tax-free, except if the settlement is for punitive damages which is subject to tax.
- The total amount received from a structured settlement is slightly higher than that of a lump-sum settlement because structured settlement payments are paid out of an interest-bearing account.
- The payments can be devised to cover your future as well as immediate needs.
- A structured settlement can be combined with a lump sum settlement to meet immediate expenses such as medical bills, debt repayments, funding college education, rehabilitation costs, including others.
- Involved parties may decide to dedicate part of the settlement to cover anticipated advances in medicine so that if a cure is developed in future, the plaintiff may give it a try.
- Certain parts of a structured settlement can be taxed, including punitive damages and emotional damages lawsuits which are not as a result of physical injury.
- Unknown economic changes such as recession or inflation can negatively affect the structured settlement. E.g, future periodic payments could be greatly reduced as a result.
- It may not be possible to help people monetarily with a structured settlement.
- Monthly payments may not be enough for emergency cases such as immediate home renovation/repair, college fees, repayment of debts, including others.
- Structured settlement payouts may cease once the plaintiff dies.
Lump-Sum Settlement: Pros and Cons
- With lump sum payments, you have full control of your funds right away, unlike structured settlement payments which are locked until the next periodic payment date.
- A lump-sum payment can be used to meet your needs for immediate needs such as paying medical bills, purchasing or renovating a house, buying a car, funding college education, and even repaying debts.
- If you’re a good money manager, you can choose investments providing higher returns with a lump sum settlement compared unlike with a structured settlement.
- A lump sum payment can be combined with a structured settlement to meet immediate expenses such as medical bills, rehabilitation costs, debt repayments, funding college education, including others.
- Lump-sum payments may allow for long-term investing.
- It’s possible to help people monetarily with a lump-sum settlement.
- The age of the plaintiff, health, and other situations may make a lump-sum payment more suitable as payouts cease once the plaintiff dies in a structured settlement.
- The total lump sum payments may not be largely affected in case of a recession or inflation, unlike with a structured settlement
- The total amount received in a lump-sum payment is lower than that from a structured settlement.
- Receiving a lump sum payment can be overwhelming and you may therefore be tempted to overspend.
- In some cases, lump-sum payments are taxable.
It’s advisable to seek the assistance of a qualified and experienced personal injury attorney or financial advisor to help you decide whether a structured settlement or a one-time lump-sum payment would be in your best interest.
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