So how much do you really know about structured settlements? It may not seem like the most interesting or fascinating thing to really research into, at least that’s what I thought until I actually took the time to figure out what they are and how they work.
The first thing we should discuss is exactly what structured settlement means and how they are used. A structured settlement is a voluntary agreement between two parties, the injury victim and the defendant. The victim can be anyone from someone injured in a car accident to a family member in a wrongful death claim. The defendant is usually something similar to an insurance company. The victim, in this case, would not receive payment for their injuries in one lump sum, but in tax-free payments paid to them over time. These payments can be set up in a variety of ways, for example, monthly, quarterly, annually, or smaller payments monthly with future larger payments over a 10 or 20 year period. How your settlement is arranged is negotiable, and would be negotiated between the attorneys representing both sides of the case. The purpose is to help the victim meet future medical expenses and basic living needs, so it should be tailored to best meet the financial needs of the victim.
Now that you know the basics, let’s discuss the options so you can determine what best fits your needs. There are advantages to having structured payments, such as steady, consistent income coming into the household. Another benefit is the tax advantage. The tax code states explicitly that 100% of structured settlements are exempt of federal and state taxes. The interesting thing is that a lump sum is 100% tax exempt as well. So we can consider that a benefit regardless of whether you choose the structured payments or a lump sum.
On the other hand, one of the disadvantages of structured settlements is once you agree to a structured settlement over time, you are limited to that schedule unless you sell your annuity to a company like Prosperity Partners. Such a settlement cashout company assists clients in a time of financial need and purchases the structured payments so the victim in this case, or the person receiving the payments, can have all or a portion of their payments “right now” to relieve any financial burden they might have or give them the option of investing their own money privately.
Which brings me to the next benefit: receiving your settlement in a lump sum or selling a portion of your payments in order to invest privately. Now, I know you may not feel confident in every investment market, but you do not need to follow the stock market or juggle options in order to invest privately. Do some research yourself about what your options are or speak with an investment specialist or a financial planner. The reason this is important is that when you receive payments over time in a structured settlement or annuity, a lump sum is put into an account or investment for you to accrue interest. It is then paid to you over the period of time that is agreed upon by the attorneys as we discussed earlier. That is somewhat relieving to some people who do not wish to maintain their own investment, however if you were to invest privately, you would have a chance of increasing the return on your investment. Also, if you were ever in a financial situation when you needed the money now, you would have more control over your money. With settlement payments you would have to sell all or a portion of the payments to receive the money you needed.
The most important thing is to know your options and feel confident that you are making the best decision for your particular needs. Don’t be afraid to ask questions and you should research into what your options are before you make any decisions. Knowledge is power and when dealing with life changing decisions like these you should have all the firepower you can get!
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