Structured settlements are compensation payments for plaintiffs as part of civil lawsuit settlements. Instead of a lump sum payment, you get tax-free payments over time. Choosing structured settlement funding may be a better option if you have a larger settlement award. In any case, you have the right to choose any method that suits your unique needs. The court cannot dictate one over the other.
How Do Structured Settlements Work?
If you’re wondering how structured settlements work in a personal injury case, here’s what happens. A structured settlement can be negotiated by the defendant in a personal injury lawsuit, or a court might order the defendant to do so. The defendant or a court may set up a payment plan through a qualified assignee.
In the next step, this assignee negotiates the terms, buys an annuity from an insurance company, and the defendant pays for it. Once everything is settled, the insurance company pays the plaintiff according to the agreed terms. According to the terms and conditions agreed upon by the parties, the insurance company pays the plaintiff once the agreement has been finalized.
Advantages of Structured Settlements
Structured settlements can provide long-term financial security, especially in cases involving personal injury or disability that prevents you from working. Structured settlements ensure that you’ll have a steady source of income, which protects your financial future. In addition to this important benefit, the government supports structured settlements because they help compensate victims for their injuries over time—which is necessary in cases when an accident permanently hurts or disables someone and prevents them from working.
It does this by exempting the payments from taxation so that you won’t have to pay taxes on them—and if, God forbid, you pass away before all the money has been paid out in its entirety due to some unforeseen event or illness…your beneficiaries will continue receiving tax-free payments.
You have complete control over when you begin receiving payments and for how long. Whenever you need money for medical bills or other financial obligations, you can request payment. However, remember that interest increases during the deferment period. You also have the option to decide the duration of receiving the total amount. You can choose to receive payments for the rest of your life or for a specific number of years.
Unlike stocks, bonds, and mutual funds, structured settlements are not affected by market changes and are guaranteed by the insurance company that issued the annuity.
Disadvantages of Structured Settlements
When considering a structured settlement, you should keep in mind that once the terms are set and the contract is signed, it may be difficult to renegotiate. Any changes will require approval from the insurance company.
If you need a lump sum of cash for an emergency, selling some or all of your future structured settlement payments is one option. However, it can be very expensive because the rates that third-party buyers offer you are much higher than those offered by banks and other financial institutions—banks don’t provide structured settlement loans.
Last thoughts
Structured settlements offer a form of long-term financial support for people who have sustained serious injuries. But before making that decision, you should strongly weigh the pros and cons. To determine the best option for you, consider your individual needs and discuss the matter with your family or spouse.
Ultimately, research the tax implications in full and the legal obligations of this option. Make sure to understand all the details and terms of the agreement before signing anything.
