If you have suffered physical, emotional, or mental health issues due to the negligence of another person, you are entitled to file a lawsuit for personal injury and claim compensation for the wrong done to you.
If your claim is successful, the court of law will grant compensation to you. There are two possible options to receive the settlement award.
You can either receive the settlement money in a lump sum or you can request a periodic payment through a structured settlement payout.
Here we will discuss the concept of structured settlements, its pros and cons, and the procedure to opt for structured settlement instead of availing the option of a one-time lump-sum amount.
What is a structured settlement?
A structured settlement is a stream of tax-free payments granted to the plaintiff in a civil lawsuit settlement.
In a lawsuit in which the settlement award is small, the claimant may receive the amount in lump sum whereas, for more considerable sums, the plaintiffs may opt for structured settlement funding.
These are the two options available to a plaintiff, and it is the discretion of the plaintiff to choose any method which suits their peculiar conditions, and the court any other authority cannot force them to choose either option. This is why it is important to compare the pros and cons of structured settlement before making a decision.
How do structured settlements work?
In a personal injury case, the defendant may agree to pay to plaintiff through a structured settlement, or the defendant may be directed by a court of law to set up a settlement payment.
Both parties employ a qualified assignee to negotiate the terms of the structured settlement agreement. Then the eligible assignee purchases an annuity from an insurance company, and the defendant pays for this. Once the arrangement finalizes, the insurance company makes the payment to the plaintiff in accordance with the terms and conditions agreed upon between the parties.
Advantages of structured settlements
- Structured settlements provide financial security to the claimants. It is beneficial, especially in cases of personal injury claims in which the claimant may not be able to continue employment due to the injuries caused. If the claimant receives the payment in a lump sum, there may be a temptation to make extravagant purchases, creating financial issues in the future. Whereas, the structured settlement reduces the temptation of wasteful spending and ensures the financial security of the plaintiff.
- Government agencies support structured settlements to ensure the long-term welfare of victims of personal injury claims. Therefore, the government provides tax exemption on the payments. The payment provided to the claimant is not included in the net income. The claimant is not obliged to pay taxes on the amount received through the structured settlement.
- If the recipient of the structured settlement funding dies and the amount of settlement is available, the beneficiaries of the deceased will continue to receive tax-free payments.
- It is the discretion of the plaintiff to decide the schedule of the payment. The plaintiff can choose any length of time to initiate payment. If you need money to pay for your medical bills and other financial liabilities, you can request to initiate payment. Otherwise, you can defer the payment for any length of time. Some people deferred the payment till their retirement. During this time, the interest increase, and the benefits will increase. Similarly, you can decide the duration for receiving the total amount. You can determine whether the amount should be paid for the rest of your life or for a specific number of years.
- Unlike stocks, bonds, and mutual funds, structured settlements do not fluctuate with market changes. Payments are guaranteed by the insurance company that issued the annuity.
Disadvantages of structured settlements
- If the terms of the settlement have been finalized between the parties, it is difficult to renegotiate the terms. Therefore, if any emergency arises and you need money in a lump sum, it will be difficult to negotiate over the terms of the contract.
- You cannot invest a lump sum amount as opposed to receiving a structured settlement, so you won’t be able to accrue greater benefits over the period of time.
- You can use a lump sum amount to pay outstanding debts, medical bills, and other financial liabilities. Whereas the regular payment received through structured funding may not be enough to satisfy all financial liabilities at once.
You can compare the pros and cons of structured settlements and make a decision that suits your particular circumstances.