An Overview Of Structured Settlements

If you or a loved one was hurt at work due to medical malpractice or from another personal injury, you may be entitled to a settlement to cover medical bills, lost income, and more. If the settlement amount is small, receiving a one-time payment (lump sum) might be a better option. However, getting the funds distributed gradually over time may be a good idea if the settlement is larger. This article covers the pros and cons of structured settlements, and how they are different from a lump sum settlement.

First, let’s begin by defining what a structured settlement means.

What is a Structured Settlement and How Does it Work?

A structured settlement is a negotiated arrangement of consistent, tax-free payments awarded to injured victims or their families after an accident. The purpose of the payments is to cover the cost of damages and injuries spread out over time. It offers the plaintiff long-term financial security rather than a lump-sum payout. Here’s how a structured settlement works:

1. A person is seriously injured due to medical malpractice, at work, or in another personal injury setting
2. A settlement is reached with regard to a total amount of monetary compensation for said personal injuries
3. Before a check for the settlement would be issued, the subject of a structured settlement would be addressed

Structured Settlement vs. Lump Sum Settlement

Lump sum settlements are the default standard for civil settlements. They often make the most sense for small and medium-sized settlements. As for settlements above $150,000, structured settlements can be a better option thanks to tax-free advantages and the allocation of funds over time. Receiving the funds gradually over time prevents awardees from spending their settlement funds too quickly. The awardee may also receive more money in the long run since the funds grow over time through the annuity policy. 

While personal injury settlements are usually not taxable, you must pay taxes on the interest and dividends from any investments made with lump sum settlement funds. Structured settlements, on the other hand,  provide less money in the bank all at once, but allow for investment of the funds without incurring tax liability in the future. Note that it’s a better time for a structured settlement when interest rates are higher. 

Here’s a quick summary of the advantages and disadvantages to consider when choosing between a structured settlement vs. a lump sum settlement.

Advantages of a structured settlement:

• Future payments are tax-free
• Consistent funds over time if you cannot work or will need to cover ongoing medical expenses
• Funds can’t be burned through quickly

Disadvantages of a structured settlement:

• There may be hidden fees associated with setting up a structured settlement
• Does not make sense for a smaller settlement amount
• Your money may be tied up in a structure and earnings may not be worth it if the rates are too low

Advantages of a lump-sum:

• Able to quickly pay off bills from the settlement
• Can fund large purchases like a house or a car
• No associated setup fees 

Disadvantages of a lump-sum:

• For many settlement awardees, a lump sum can be spent too quickly
• If you invest the money, you will be required to pay taxes on earnings

Before making any decisions about a settlement, discussing your options with an Evansville personal injury lawyer can help you better understand your option’s advantages and tax implications.

Structured Settlement Pros and Cons

Pros

• Tax-free payments for the recipient or beneficiary.
• All aspects can be negotiated: immediate funds or deferred, over any length of time, and can include a lump sum payout or later increases.
• Payments allocated over time can reduce the temptation to spend too quickly and allows for guaranteed future income.
• No fluctuation with market changes. Typically, the structured settlement has a guaranteed rate of return.
• Interest accumulates on the annuity, meaning a structured settlement will yield more over time than a lump-sum payment.

Cons

• Some risk involved, if the insurance company handling the structured settlement goes bankrupt, you lose the structured settlement. This risk is low given that any such company would need an excellent credit rating (i.e. AAA credit rating).
• If you have an emergency, the funds are not immediately available to you.
• No lump-sum payouts mean you lose out on the ability to place it in other investment options with higher return rates.
• It’s difficult to renegotiate terms if your financial situation changes or in response to changes.
• If you need the money immediately, you can sell your payments, but they’ll be at a severely discounted rate.
• Insurance companies are not required to disclose their rates for establishing structured settlements in all 50 states. You could unknowingly get stuck paying significant administrative fees.

Examples of Structured Settlements

• Personal Injury: If a person gets seriously injured and believes another individual is responsible, they can file a civil case to seek repayment for medical bills, missed work, or other costs. If the defendant is found responsible, a structured settlement is an option for paying that out.
• Workers’ compensation: When an injured employee is unable to work, a worker’s compensation lawsuit may result in a structured settlement to replace missed income or to cover the cost of medical bills associated with the work-related injury.
• Medical Malpractice: If an individual is seriously injured or dies due to medical malpractice, the physician’s insurance may be held responsible for covering the cost of a structured settlement as part of a medical malpractice settlement. 
• Wrongful Death: Wrongful death lawsuits often result in structured settlements to provide funds for the families of individuals who pass from events such as negligent care, medical malpractice, poisoning, or elder abuse.

Recommended reading: Types of Personal Injury Compensations

Structured Settlement Payment Amounts

How much is paid out for a structured settlement differs from the lump sum payment amount.  Because it is delivered over time, it is considered a “future income stream” and is calculated by its present-day value. How much is paid in by the defendant to the annuity policy will be less than the lifetime value because of the interest that grows on the money over time.  

Recommended reading: Indiana personal injury damage caps

To fully calculate the value of a settlement, consult a personal injury attorney about your unique case. 

FAQs

Navigate Your Settlement With Help From Evansville Personal Injury Lawyers

Life after injury or loss is difficult enough. There’s no need to navigate the settlement process without help from a personal injury expert. The attorneys at Tuley Law Office have the experience to guide you through the settlement process and help you decide whether a lump sum or structured settlement is the best choice. We’ll fight for you every step of the way to get you the maximum settlement you deserve.  Call our Evansville personal injury lawyers for your free consultation today!