If you’ve ever watched television late at night, you’ve probably seen commercials from companies that buy structured settlements. While these ads make it sound like a structured settlement is a burden that you need to get rid of, many accident victims actually benefit from structured settlements.
If you don’t understand what a structured settlement is, you’re not alone. Many people find them confusing. In this article, we’ll explain the basics of structured settlements and how they work.
What Is a Structured Settlement?
Most personal injury settlements come in the form of a lump sum. With a lump-sum settlement, you get a single payment in exchange for giving up your legal rights to file a personal injury lawsuit. Typically, you will not receive any additional payments or compensation from the insurance company once you accept a lump-sum settlement.
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Structured settlements are less common. With a structured settlement, the insurance company pays your settlement in installments over a set period of time rather than all at once.
Typically, in a structured settlement, you will receive a fairly large initial payment followed by periodic smaller payments. Depending on the terms of your structured settlement, you might receive a check each month, every year, or after a set period of years. Some structured settlements end after a specific period of time, while others provide payments for life.
When you agree to a structured settlement, the insurance company will generally fulfill their end of the deal by purchasing an annuity for you. An annuity is an insurance policy or investment that guarantees a schedule of payments over time. Typically, the annuity is managed by a separate company from the insurance company you made the settlement agreement with.
“Structured settlements can offer you a sensible way to manage your finances and protect your long-term interests.”
The Pros and Cons of Structured Settlements
Structured settlements can offer you a sensible way to manage your finances and protect your long-term interests. However, not all structured settlements provide a good deal for accident victims. Below, we’ll discuss some potential pros and cons of structured settlements.
PRO: You Might Get More Money Over Time With a Structured Settlement
When an insurance company purchases an annuity as part of a structured settlement, they don’t pay the settlement’s full value. Instead, they negotiate with the company selling the annuity and agree on a price that is based on the settlement’s value, your life expectancy, and other factors. Since the insurance company doesn’t pay the full value of the settlement in this scenario, they might be willing to offer significantly more money than they were prepared to pay in a lump sum.
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PRO: Structured Settlements Provide a Sense of Financial Stability
People tend to make unwise financial decisions when they receive a large amount of money. (Just look at how many lottery winners end up in bankruptcy.) When you receive a lump sum settlement and you’ve been living on a very limited budget during a lengthy lawsuit, it can be very tempting to spend your settlement on the luxuries you’ve been missing out on for years.
Unfortunately, we see too many clients use their settlements for expensive vacations, new cars, and upgraded homes. Suddenly, they’ve spent their entire lump-sum settlement, and they lack funds to cover their ongoing medical expenses and other necessities.
Because structured settlements are paid over time, you can’t spend your settlement as quickly. If you’re someone who has trouble exercising discipline when it comes to planning your finances and spending money, it’s okay to acknowledge that and decide that accepting more gradual settlement payments might be in your best interests.
Structured settlements can also be very beneficial if the accident victim is still young and will require long-term medical care. In these cases, a structured settlement can ensure a regular income stream for someone who will have a lifetime of medical expenses and lost income.
Keep in mind, however, that taking a structured settlement isn’t the only way to get your money over time. The companies that sell annuities generally offer them to everyone, not just other insurance companies. You can take a lump-sum settlement, use the money to purchase an annuity yourself, and get a similar benefit in terms of stable long-term income.
PRO: Structured Settlements Sometimes Offer Tax Benefits
In general, funds from a personal injury settlement are not taxable. However, if you receive punitive damages or compensation for emotional injuries, you might have to pay income taxes on these proceeds. In a structured settlement, your taxable income is spread out over time, which might help you stay in a lower tax bracket.
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CON: You May Not Have Enough Money Up Front to Catch Up on Bills or Make Big Purchases
While a structured settlement discourages unnecessary spending, you might find that it restricts your financial options. After a lengthy insurance dispute and lawsuit, you’ll probably feel like you’re drowning in bills. You also may have postponed necessary home improvements, car repairs, and educational and business opportunities. If your initial structured settlement payment is modest, it might not cover all of the things you need to catch up on.
So, can’t you just sell your structured settlement to one of those companies that air the ads on television? Unfortunately, it’s not as simple as it sounds. In Texas, all structured settlement transfers must comply with the Structured Settlement Protection Act. This means you’ll have to convince a judge that the transfer is in your best interests and get a court order before you can legally sell your settlement.
This is why you should never assume that you can simply sell your structured settlement if you need money fast. It’s also why you should consult an experienced personal injury lawyer before you accept any type of settlement. A lawyer can help you understand whether a structured settlement is in your best interests and meets your financial needs.
CON: Your Structured Settlement Might End if You Die Unexpectedly
Many structured settlements end when the victim who received the settlement dies. When the insurance companies set up a structured settlement, they typically base it on life expectancy tables that track the average lifespan of a relatively healthy person. If you die earlier than expected and your settlement doesn’t include survivorship rights, your family might lose a significant amount of compensation.
CON: It’s Difficult to Understand a Structured Settlement’s Present Value
The “present value” of a structured settlement can seem like a complicated concept, but the idea behind it is simple: Your structured settlement is worth less money than it seems. Why? Because of inflation. Your structured settlement payments will stay the same over time, but the same amount of money will buy less in the future than it does today.
Most people deal with the problem of inflation by investing their money, but with a structured settlement, you can’t invest most of the funds because you haven’t received them yet. Calculating your structured settlement’s present value can help you decide whether you would get a better return by taking the lump sum settlement and investing it.
The calculations that go into figuring out a structured settlement’s present value can be complex, and most accident victims can’t do them accurately on their own. Instead, they require help from an experienced personal injury lawyer, probate attorneys, and financial experts.
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Questions to Ask Yourself Before You Accept a Structured Settlement
Structured settlements often look enticing, especially when they seem to offer a high payout than a lump-sum settlement. However, before you accept a structured settlement, you and your personal injury lawyer should consider the following factors:
- What is your realistic life expectancy?
- Does the structured settlement allow your heirs to continue receiving settlement payments after you die?
- What are your chances of returning to gainful employment?
- Do you anticipate ongoing, expensive medical care for your injuries? Will your periodic payments cover the resulting costs?
- Would you be better off purchasing your own annuity rather than accepting a structured settlement?
- Would a structured settlement impact your rights to government benefits like Supplemental Security Income (SSI) and Medicaid?
- How comfortable are you managing your finances?
- Do you need funds for tuition or a business startup?
Together, you and your attorney can assess your unique circumstances and decide whether a structured settlement meets your long-term goals and provides a good value overall.
Crosley Law Firm: Helping Injured Victims in San Antonio
If you were injured by someone’s negligence or recklessness, contact Crosley Law Firm for a free, no-risk evaluation of your case. We help our clients understand the value of their claims and work to get them fair compensation, whether by negotiating a settlement or fighting for them at a trial.
The content provided here is for informational purposes only and should not be construed as legal advice on any subject.