If you've been offered a settlement because of a personal injury, there are many different ways of getting paid the money, but there are really just two categories. One way is a lump sum payment, and, as you might have guessed, this is a single payment of an agreed upon amount of money. The other way to be paid is with a structured payment, and this form of damages can be broken up in many different ways. To help you decide whether or not a structured settlement (or an annuity) is right for you, read on.
The pros about structured settlements
1. While a portion of the settlement may be exempt from federal and state income taxes, certain portions may not be. A structured settlement allows you to keep more and pay less tax on the amount by taking it in smaller amounts over time. For example, certain punitive awards and interest on settlements are taxable. You will need a financial expert to help you understand how the settlement affects your tax situation.
2. If you are younger, a structured settlement gives you the opportunity to invest your money and to pay for medical needs that might arise later on because of your injuries. Those who are older may want to have their money paid upfront since they have less to gain by investments and will have less need for a lifetime of medical care.
3. A structured settlement offers ways to set aside funds for specific needs in the future even if those needs cannot be foreseen at the time of the offer.
4. In most cases, your money is protected by insurance laws that allow claims and financial obligations to be covered regardless of the fiscal fitness of a particular insurer. Insurance companies cannot technically declare bankruptcy, but they can go out of business suddenly.
5. You can have a hybrid lump sum and structured settlement plan that is custom-made for your needs. If you need a sum of money to quickly get caught up on bills and pay for immediate needs, you can do so and then have the remainder come to you in regular payments.
6. If a new, previously-unknown medical advancement means more help for your condition, then this form of payment structure could provide you with the funds to take advantage of it.
7. A structured settlement is easier on the insurance company since they aren't facing an immediate and large financial obligation. This plus for them could factor into their willingness to pay you what you are asking.
The cons about a structured settlement
1. It's difficult to account for inflation. What at first seemed like a nice sum of money each month or week may begin to look smaller and smaller over time.
2. When you cannot work at your job because of your injuries, it may be more difficult to stretch the structured payments out to meet the budget.
3. While a structured settlement may not be taxed as income, it may not qualify as income when you need it. For example, a lump sum settlement could be enough to buy a vehicle outright, but a structured settlement may be not enough income to qualify you for financing.
This is a complex issue that deserves a lot of thought and expert advice from your experienced injury lawyer and tax expert.