Structured Settlements: What Are the Pros and Cons?

Structured Settlements

Structured settlements are a financial product often used as an alternative to lump-sum payments. A structured settlement is a series of payments made over time for an injury or lawsuit. This type of settlement can be helpful for people who receive a large amount of money and want to spread it out over time or those who need guaranteed income streams to cover monthly expenses. The payments are often made monthly or annually, but the recipient can set up any payment schedule that makes sense to them and the defendant.

How do structured settlements work?

When an individual settles a personal injury claim, the defendant may offer to pay the settlement in one lump sum or through a series of payments. If the plaintiff chooses the latter option, the defendant will likely set up a structured settlement.

There are two main types of structured settlements: annuities and lottery-style payments. Annuity-based settlements involve making regular payments to an insurance company, while lottery-style settlements entail making periodic payments to a third party (usually a trust). The type of settlement the recipient chooses depends entirely on their situation and what works best for them.

What are the pros of structured settlements?

There are several advantages to structured settlements:

  • They offer guaranteed income streams, which can be helpful for people who need to cover monthly expenses.
  • The payments are typically tax-free, even when they earn interest over time.
  • Market fluctuations do not impact structured settlements, so they provide peace of mind in that sense.
  • They allow recipients to receive money over time rather than all at once, reducing the temptation for extravagant spending and guaranteeing future income.
  • Structured payments do not affect the recipient’s eligibility for other forms of aid like Social Security Disability benefits.
  • An insurance company guarantees the payments so they will continue even if the defendant goes bankrupt or dies. If the insurance company goes out of business, the recipient will still be shielded from loss.
  • Payments can be scheduled for any amount of time starting immediately or can be deferred on the recipient’s request.

What are the cons of structured settlements?

There are also some drawbacks to consider, including:

  • If a person chooses a lottery-style settlement, there’s no guarantee that they’ll receive the full amount owed. Payments may stop altogether if the third party goes bankrupt or stops making payments.
  • Once structured settlements have been finalized, there isn’t much that can be done to change them. If the recipient decides they want more money later or if their financial situation changes, they can’t renegotiate.
  • Annuity settlements can be expensive. A person may end up paying more in fees and interest than they would if they took the lump sum payment.
  • The money is not available immediately in case of an emergency. If the recipient decides to sell their payments because they need immediate cash, they will get less than what they would have received ultimately.
  • Structured settlements can be difficult to sell. This is because they are often designed to last for a specific number of years or until the recipient dies. If a person needs to sell their settlement before it’s matured, they may have to pay a penalty.

Overall, structured settlements are a great way for personal injury claimants to receive their money over time. While there are some drawbacks, most people find that these problems can be overcome with proper planning and preparation. Before getting into any settlement agreement, you should talk to an attorney to understand all of your options. It’s very important to weigh all the pros and cons before making a decision.