When personal injury claims win or reach a settlement, they may have the option of taking their earnings as a single lump sum payment or a series of installments spread out over time. This series of payments is called a structured settlement. Several considerations will determine whether you should choose a lump-sum payout or a structured settlement, such as your tax status, how you intend to use the money, and whether you require help managing a sizable chunk of money.
A financing firm, often referred to as a structured settlement purchasing company, buys all or a portion of your future structured settlement or annuity payments in exchange for a one-time payment of cash. If you decide to sell your payments, it’s critical to find a reputable structured settlement buyer who will make you a fair offer.
Evaluate some of the factors you should take into account when determining whether to accept a structured settlement versus a lump-sum payout if you succeed or relax your complaint as well as how a structured settlement operates.
A Structured Settlement’s Function
Instead of getting a lump sum payment from the defendant, if you choose to accept your award as a structured settlement, you will receive regular payments over the course of a certain number of years. If you receive a $500,000 award, for instance, your structured settlement might mandate that the defendant pay you $50,000 each June for ten years.
A structured settlement might be created to pay out when you need it most. Here are some possibilities.
- Huge down payment- let’s say you’ve been jobless for a while and your expenses are growing. In order to cover past-due payments, settle a mortgage, or buy necessities like a new automobile, you can construct a structured settlement to offer a sizable first payment. The succeeding smaller payments might then replace the lost income.
- Additional sums for unforeseeable costs -A yearly income is intended to be provided by some settlements, with additional funds being permitted to cover exceptional costs like college tuition.
- Payments rise gradually– Structured settlements can also be made to gradually increase payments over time, with lower initial payments and higher final payments.
- Payments diminish over time– Structured settlements may also start out high before gradually declining. This could be advantageous.
- Delayed payments- Some defendants even choose to delay payment of their damages until they reach retirement.
Settlement Structured as an Annuity
The defendant will frequently obtain an annuity from an insurance firm in order to fulfill these periodic payouts. The defendant can then delete your obligation from its books and assign payment duty to a business with experience handling monthly payments.
Some experts contend that transferring the annuity to an insurance provider is a more secure option than depending on the soundness and stability of the defendant organizations’ businesses.
Benefits of taking your settlement in cash
Cashing out a structured settlement has costs, but there are also advantages to doing so.
1. A one-time payment to cover large expenses
You may be able to meet important financial demands without taking out a loan by liquidating a structured settlement and receiving a single payout. This could involve paying for a wedding, a home, college tuition, or medical bills.
2. The ability to pay off debt all at once
Cashing out a structured settlement could give you the money you need to quickly pay off your bills and get back on track if you have a lot of debt. “Individuals experiencing financial difficulties may obtain the funds they require to address their issues by cashing in a settlement.
3. Serenity of mind
It goes without saying that liability and a lack of funds can be stressful. You can feel more at ease if you pay off your debt or use the assets from cashing out a structured settlement to salary for significant life necessities rather than taking out loans or using credit cards.
Disadvantages of cashing your settlement
Before cashing out your structured settlement consider the price you will pay and some of the other disadvantages.
- Loss of funds – Your monthly settlement payments are paid by settlement buyers at a discount rate, so opting for a cash-out plan will result in lower profits than if you had chosen to receive the payments gradually as planned.
- It’s not direct cash – Despite the circumstance that you are cashing in your structured payment, it still takes some time to accept the money. Usually, the sale must be reviewed and approved by the court. According to Sexton, the transfer may take up to 45 days or longer to complete. “The vendor becomes stressed out by this wait because they frequently require immediate cash,”
- Decrease in long-term security
Structured cash settlements offer a consistent and stable flow of money, frequently for a number of years or possibly the rest of your life. Additionally, receiving the funds in installments rather than in one lump sum shields you from overspending or using them up quickly. “There is a loss of security in addition to the loss of money. Money that was set aside has suddenly vanished, according to Sullivan.
Should You Choose a Lump Sum or a Structured Settlement?
A structured settlement versus a lump sum payout might have long-term tax and personal implications. Here are a few things to think about. Make careful to address these with your financial advisor or attorney.
What Are Your Tax Duties?
Depending on whether the damages are meant to penalize you or recompense you for bodily harm or illness, your award may be taxable or tax-free (meaning they are intended to punish the defendant for its actions).
Your tax obligation may vary depending on whether the payment is made in a flat amount or over time. Because the legislation is complex, consult a tax attorney or professional.
To sum up
A structured settlement can be cashed out to provide access to a sizable sum of money for an emergency, a big life expense like a home purchase, or to cover college expenses. But carefully weigh all the consequences before making such a big choice. To make sure you’re getting the best bargain possible if you decide to proceed with a sale, get proposals from at least two to three prospective bidders.