A personal injury lawsuit could result in a settlement agreement between the parties involved, or it could end up in a court decision awarding damages to the plaintiff. According to statistics, almost 90% of all possible lawsuits get settled outside the courtroom, and settlements have become a preferred option for many parties since they are faster and less expensive. Once both parties agree to the settlement terms, the next step is to determine how the payment will be made.
The choice of a settlement payment mode can impact both the payer and payee, especially if the settlement amount is substantial. This means it may take some basic understanding of what your settlement payment options are — to find the type of payment that best fits your unique needs.
Settlement method options
There are two options for paying out settlements: a lump sum payment or a structured settlement.
A lump sum settlement payment
A lump sum payment is when you receive the entire settlement amount at once. The advantage of a lump sum payment is that the plaintiff has immediate access to the money, which can be invested wherever they want. A lump sum settlement can be beneficial when immediate expenses are necessary, such as medical bills or other urgent needs.
A disadvantage of a lump sum payment is that if you don’t have the financial discipline to manage the money wisely, you may spend the settlement money frivolously.
A structured settlement payment
On the other hand, a structured settlement is when you receive the settlement amount in periodic installments. This can be advantageous since it creates a long-term cash inflow. You can use this inflow to invest in annuities that ensure the disbursement of ample amounts periodically to meet your needs permanently. A continuous inflow of money can also be put into skill acquisition, which can be a permanent investment with permanent benefits.
Structured settlements may not be beneficial for everyone and depend on individual circumstances. For example, if you have a large expense that you need to pay upfront, a structured settlement might not be the best option.
Deciding factors between a structured settlement or a lump sum payment
When deciding between a structured settlement and a lump sum payment, there are a few factors to consider to help you make the best choice for your situation.
- First, consider your financial goals. If you have long-term financial needs, such as ongoing medical expenses, a structured settlement may provide you with a steady stream of income over time. If you have more immediate financial responsibilities, a lump sum payment may be more beneficial.
- Next, consider the tax implications of each option. Lump sum payments may be subject to higher taxes than structured settlements, which can be spread out over time and may be taxed at a lower rate. For example, monies received due to the loss of income are entirely taxable. Additionally, the correct usage of settlement monies will determine whether taxes are payable or not, as investments made from settlement monies will be taxed at the usual rates.
- You should also consider your risk tolerance. A lump sum payment can provide you with more control over your money, but it also comes with the risk of potentially losing or spending the money too quickly. A structured settlement provides a guaranteed income stream but may not offer more money when you need extra cash immediately.
With all of these explained, the decision between a structured settlement and a lump sum payment will depend on what your needs are and your financial skills. Since there are tax regimes, there may or may not be liabilities you may have to face when obtaining large sums. But in addition to taxes, you may also have outstanding debt, child support, bankruptcy liens, and creditors may be able to strip you of some or all the amounts you receive.
Remember, your financial management skills are crucial in determining whether the received amounts may last to procure benefits. That’s why you should take your spending habits seriously. Your realistic spending habits will ultimately matter when it comes to deciding how you should obtain your settlement amounts.
There are pros and cons to both lump sum payments and structured settlements. However, when it comes to what method to choose, you’ll need to do more than just blindly accept a settlement. While a lump sum payment can give immediate access to funds, it can also lead to financial irresponsibility. A structured settlement can provide long-term financial benefits but might not be suitable for immediate expenses.
Overall, consider factors such as tax implications, current debts, and financial management skills before deciding how to receive a settlement payout. By doing so, you can make a financial decision that maximizes your benefits and your future.