In managing settlement proceeds, especially those from personal injury or medical malpractice cases, or wrongful death settlements, there is often a really big decision: Lump sum or structured settlement payments? That is, the alternative to a one-shot payment can take the form of regular income payments that may stretch into years or even decades. What are structured annuity settlements? In this guide, we will cover what they are, how they work, and the potential benefits and drawbacks that they bring.
What Is a Structured Annuity Settlement?
A structured annuity settlement is a financial planning in which the settlement award is distributed over time by creating a series of periodic payments instead of one big lump sum payment. Typically, this is the only type of settlement used for those claims which come through huge money in a lawsuit, such as those cases of personal injury lawsuit, medical malpractice claims, or workers’ compensation. Its idea is to enable the receiver to have a steady flow of finances for the rest of his/her life.
Structured settlements are designed to be stable and secure. The recipient need not worry about how to manage large sums of money all at once but will receive a predictable flow of regular income that eventually could become necessary to pay for ongoing medical expenses or everyday living costs.
How do structured annuity settlements work?
When a structured settlement is agreed, the defendant-or his insurance company-buy an annuity from a life insurance company. An annuity is simply a product that funds a series of payments over time. The life insurance company will then pay the recipient, according to the schedule agreed, per terms set out in the settlement agreement.
The form of these payments may be highly flexible. Payments may commence at the time of signing, or they may be due at some other date in the future. Payments may be structured to provide level payments on a periodic basis, or they may be scheduled to provide higher payments at certain years when expenses may be greater, such as at times when a person might anticipate needing medical procedures or when a child may go off to college.
Advantages of Structured Settlement
Security of long-term finances- Above all, the peace it offers knowing one is secure for a long time due to income from a structured settlement. This can really help those people who have been disabled from ever being able to work again due to a severe injury or illness.
Tax Benefits: Assuming the basic settlement is emanating out of a personal physical injury or illness, payments from a structured settlement are tax-free in most cases. This kind of tax benefits can make the difference, giving structured settlements a vital financial advantage over any other investment vehicle where the earnings may be taxable.
Protection from Spending Too Much: Spending a huge sum of money can be challenging, especially for those who are not financially prepared for such a milestone. A structured settlement prevents the risk of spending the settlement money too quickly and having nothing left for later in life.
Customization Options: Structured settlements can be tailored to meet the recipient’s needs, allowing for flexible payment arrangements. For example, if a recipient knows they will need extra money for medical treatments or educational expenses, the payment schedule can be adjusted accordingly.
Drawbacks to Consider
Not Flexible: Once the terms of a structured settlement have been established, they cannot be easily changed. This can be a disadvantage if your financial condition changes, or you experience some unplanned expenses. You cannot speed up or slow down the rate of payment for money received through such a settlement. That can be a disadvantage for the controlling nature of people who like to have control over the flow of their finances.
Opportunity cost: The potential losers in structured settlements are the recipients who could have used the lump sum for their own investment – again, maximum return may not be guaranteed. The stability of an annuity may look appealing but may come at the cost of investing in potentially more lucrative options.
Dependence on the Insurance Company: Because a structured settlement is funded by a purchased annuity from a life insurance company, the recipient’s payments depend on the financial health of that company. It’s crucial to choose a reputable, stable insurer to minimize this risk, though state insurance guaranty associations often provide some protection if an insurer becomes insolvent.
Lump Sum vs. Structured Settlement: Which is Right for You?
It is hard to choose between a structured settlement and a lump sum since this depends on your financial condition, your ability to handle large sums of money, and how you are to use it in the long run. In most cases, a structured settlement offers security and assurance that their future will be financially secure. However, if you have the capacity and willingness to invest and manage such a big sum wisely, then that would be worth considering for greater returns.
A lump sum may be appropriate for those who will need to have access to higher dollar amounts sooner. But if the aim is to ensure an ongoing flow of money to protect against outliving the funds, then a structured annuity settlement often makes a good deal of sense.
Final Thoughts
Legal settlement monies can be handled in a structured annuity settlement, something to be managed with the understanding of seeking some balance between providing security and planning for future times. It may not grow much if one is comparing it to a lump sum investment; however, structured annuity settlements do provide tax benefits and certain guaranteed payments. As with any financial decision, I would simply recommend one seeks the opinion of a financial advisor on which best works according to your needs and goals.