Imagine you slip and fall on a wet floor in a department store. Perhaps your parked car is rear-ended by a rushing food delivery van. Maybe you are misdiagnosed with a chronic illness and negligently prescribed medication that causes kidney damage. In all these cases you could suffer debilitating injuries and loss of quality of life and earnings.
If you go to court to sue for personal injury and win, you are usually awarded a monetary sum as compensation. You can decide how to receive this money through what is known as a structured settlement. After all, your life has been severely negatively impacted by the negligence of others. But your troubles might not end there. If you receive lump sum of cash for structured settlement, it can be difficult to manage.
You might be tempted to spend it all at once, or you could be manipulated by others to part with some of your money. But your injuries require a steady stream of predictable income to manage your medical and pain requirements for a long period of time. This is why you need to make sure your structured settlement works for you.
What Is a Structured Settlement?
A structured settlement is a legal arrangement that lays out how a monetary compensation to a victim should be structured. This payment could be in the form of a lump sum or a steady supply of smaller payments. The defendant—be it the department store or the food delivery company—pays the settlement.
If the compensation is a small amount of money, it might be wise to just receive a lump sum. But for larger sums, structured settlement annuity is the way to go.
In the case of a structured settlement annuity, this financial instrument is managed by an insurance company that guarantees regular inflation-adjusted payments to the victim over time.
How Do Structured Settlements Work?
Whether you choose to receive a lump sum or take a structured settlement, the key differences between both annuity settlement options are:
- Long-term security
Payments received in a structured settlement is almost always tax free. However, there are rare instances where you could pay tax. For example, if you choose to sell some of your future payments, taxes could become due depending on the nature of the claim i.e. claims such as discrimination claims that do not result from physical injury are sometimes taxable. It’s best to talk to a tax professional in this case.
The most common causes of structured settlements
A personal injury case is a civil case where an injured party files a lawsuit seeking money from the party responsible for causing the injury. Monetary compensation helps the injured party pay for medical expenses or other costs.
In this case, workers who get injured on the job are paid money while they recover. The money can be channeled to medical treatment or wage replacement while the injured worker cannot work.
If someone dies a wrongful death, the courts can compensate surviving family members by replacing lost income after a loved one’s death.
When a doctor makes a mistake such as misdiagnosing a medical problem which leads an incorrect drug prescription, this could have harmful effects on the patient. Injured patients or even families of deceased patients can open a medical malpractice lawsuit.
Common Settlement Scenarios
If you choose to receive your payout through a structured settlement, you can either receive the money immediately or at a later date. If you don’t need the money now, you can even choose to take it at a much later time, such as after you retire. Your payout can earn interest until you are ready to withdraw it.
You can decide to have your payout structured for the rest of your life, or for a specific number of years. You could also select the option of receiving the payments in amounts that increase or reduce in size over time.
When deciding on the terms of your structured settlement annuity, it is important to understand the benefits along with the risks.
Pros of Structured Settlements
- Structured settlement payments are tax-free.
- If you die, the payments will continue to be tax-free for your children.
- Spreading out your payments takes away the temptation of making frivolous and impulsive purchases.
- You can structure your payments in a number of ways to suit your needs.
- Structured settlements do not fluctuate with market movements. They are guaranteed by the insurance company that issued the annuity.
- A structured settlement that is planned well over a long period of time can often yield more than the initial lump sum through interest gains.
Cons of Structured Settlements
- Once the payment arrangement is locked in, it’s virtually impossible to change it.
- This means that if you have an emergency, you cannot draw on your payout to get yourself out of trouble.
- Lawyer fees, which have to be catered for in the settlement, can be taxed.
- Depending on where you live, your insurance company might not be obliged to disclose their costs. This means that fees could eat at your funds over time.
You should give a lot of thought to how you structure your annuity because it can’t be changed after the contract is finalized. If you encounter another setback, and you want to get cash from your settlement, you have no wriggle room. You could, however, get cash in advance if you sell some of your future payments. Just be aware that this could have tax implications.
Structured settlements are both financial products and legal judgments. So, they are subject to complex regulations that require expert advice. Whether you are the injured party or family of the injured party, be sure to make smart decisions so that any pain and suffering should not be in vain.
Author’s Bio: Kathy Manson is a Finance Coach and Blogger. Currently, she is working on Cash for Structured Settlement at Catalina Structured Funding, Inc. She is very proactive and aware of each and every update of financial changes in the industry.