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Structured Settlements: Pros and Cons

Not every personal injury lawsuit will make it to trial. Many personal injury cases reach a settlement agreement earlier in the litigation process.

negotiated settlement requires the plaintiff to drop any further legal action. This is in exchange for receiving a payment from the defendant or the defendant's insurance company. Settlement payments are usually made as a lump sum (all at once) or on a structured schedule.

A structured settlement offers the plaintiff regular payments over several years. Or, if applicable, for the rest of the plaintiff's life. They are especially helpful when the plaintiff suffers a catastrophic physical injury.

With a structured settlement, a defendant's insurer funds an annuity policy for the plaintiff. An annuity produces a continuous income stream over the structured settlement term.

Annuity contracts cover a variety of expected expenses.

Before accepting any settlement agreement, discuss all options with a personal injury attorney. They can help you explore how structured settlements work. Below are some pros and cons of structured settlements for you to consider.

Pros of a Structured Settlement

  • A structured settlement may provide a plaintiff with an income tax benefit. Personal injury settlements are "tax-free payments" under the U.S. Internal Revenue Code. But some exceptions apply. They can make part of a settlement taxable. This could include an award of punitive damages. Speak to a qualified attorney or tax specialist to learn more.
  • Structured settlements offer plaintiffs the financial security of payments over a fixed period. But lump sum payments may be better for cases involving minors. They allow for long-term investing. They may also be better suited for those who will need long-term medical expenses.
  • Parties may tailor annuities to cover a plaintiff's future demands or contingencies.
  • In most states, insurance laws protect annuities. This guarantees that the obligations of an insurer will be covered. Federal law doesn't allow an insurer to declare bankruptcy. But most states have a safety net for insurance companies that become insolvent. Insurance companies and policy claims will continue to be covered and paid by the home state's guaranty association. This is subject to state limits. Learn more about the key provisions in your state if you are unsure about the specifics.
  • A lump-sum payment may be combined with a structured settlement payment to meet immediate expenses. These can include medical bills, repayment of debts, and rehabilitation costs.
  • Parties can dedicate funds of a structured settlement to cover advances in medicine. If medical science develops a miracle cure, the plaintiff can try it.
  • A structured settlement payout may help parties reach an agreement if they are far apart in their settlement negotiations.
  • Structured settlement annuities are not subject to market volatility or investment risks. The recipient will continue to receive the agreed-upon amount. This is true irrespective of the economic climate.
  • Structured settlements can accommodate individual needs. Imagine an injured party has high medical expenses. But they expect these costs to decrease over time. The settlement can be structured to provide larger payments upfront.
  • A large sum of money can sometimes lead to irresponsible spending. Receiving a series of payments over time can help injured victims and their family members manage the money. They can ensure it gets used for its intended purposes, like ongoing medical care.
  • Structured settlements can provide long-term monthly payments in workers' compensation/medical malpractice cases.
  • With a structured settlement annuity, there's no risk of outliving the money. Future payments can last for the claimant's lifetime. This can help in cases of permanent disability.

Cons of a Structured Settlement

  • Certain parts of settlement money are taxable regardless of whether they are lump sum or structured. This includes punitive damages, some attorney's fees, and purely emotional damages. Speak to an attorney about which parts of settlement proceeds you must pay taxes on.
  • A plaintiff may fear a recession or unknown economic changes could make the annuity payments too small.
  • In the past, some life insurance companies were reluctant to disclose how much they would have to pay to buy an annuity covering the settlement amount. A structured settlement usually costs insurance companies less than it would to make a lump-sum settlement. This info is necessary for the plaintiff's attorney to make a complete assessment of a settlement offer. Some states, such as New York and Florida, have a disclosure law known as the "Structured Settlement Protection Act" (SSPA). These laws force insurers to reveal their costs in these types of cases.
  • Once the parties agree on a structured settlement, changing the terms is difficult. This could be a drawback if the claimant's financial circumstances change.
  • While state insurance laws offer a safety net for insurance companies, there's always a risk that the insurance company responsible for the annuity could become insolvent. This could impact the payment of future benefits.
  • Unlike investments, structured settlements offer no chance for capital growth. The payment schedule and amounts do not change over time.
  • Some structured settlements come with high fees that can reduce the settlement amount. These include administrative fees, management fees, and attorney fees.
  • The concept of the time value of money indicates that a dollar today is worth more than a dollar in the future. This is because money can earn interest over time. In a structured settlement, the claimant might end up with less money than if they took a lump sum and invested it.
  • Structured settlements do not account for inflation. The buying power of the monthly periodic payments could decrease over time.

Learn More About Structured Settlements by Talking to an Injury Lawyer

Taking a settlement may be a faster alternative to a trial for a personal injury claim. Contact a personal injury attorney if you or a loved one suffered an injury or wrongful death. You can discuss whether a structured settlement would be in your best interests.

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