Many civil lawsuits, especially personal injury cases, are settled by both parties before they go to trial. This course of action is taken in most cases in order to avoid the high costs of a trial and to provide a quicker resolution to the suit.
Once a dollar amount for damages is agreed upon, payment is made using one of two arrangements: a structured settlement or in a lump sum. Both plans have pros and cons depending upon individual circumstances.
If you opt for a structured settlement in a lawsuit, you’ve agreed to accept payments over time. The term could be in years or even throughout your lifetime. In essence, you’ve passed up the opportunity to collect the money award in one lump sum as an agreement to settle the lawsuit and avoid any further litigation.
Structured settlements are often handled through brokers who specialize in settlement cases. The settlement amount is used to purchase an annuity through a life insurance program. A payment program is then set up based on the term of years and the monthly amount you want to receive.
Once the settlement plan is enforce, there is very little chance that you will be able to change it in order to receive money for an emergency. There are companies, however, that will buy your structured settlement at a discount price and pay you off with the net proceeds. Once a free-wheeling market with little oversight, most states now require a court hearing before a structured settlement can be purchased by a third party.
Lump Sum Payout
There may be circumstances where the winning party prefers an immediate payout of the entire amount due them. Age may be a factor. Someone seventy-six years old would be more inclined to cash out rather than someone in their mid-forties who has a longer lifespan ahead of them.
Financial needs also play a part in choosing a lump sum payment. Maybe the cash can save a house from foreclosure or avoid a pending personal bankruptcy.
Pros and Cons of a Structured Settlement
- In most cases, a structured settlement has the benefit of being tax free income. Some exceptions do occur. For instance, if part of the settlement was for punitive damages, that amount is subject to taxation. For the most part, however, the payment provide tax-free income.
- Structured settlements provide guaranteed income over the life of the agreement.
- Annuity payments are protected by many states’ insurance laws. This guarantees the obligation of the insurance company to make the payments. And in cased the insurance company becomes insolvent, most states have a safety net that insures the payments will continue.
- In cases where both parties are far apart in a financial agreement to end the lawsuit, a structured settlement offer might may make be more acceptable to both parties than a lump sum amount.
Certain parts of a settlement, like attorney fees, can be taxed,
- Inflation can make the monthly payment have less purchasing power as time goes by. What seemed like a payment amount that could cover your living expenses at the time the agreement was first singed may prove to be too small in the years.
- Insurance companies payout less over time with annuity payments than if they were to pay the upfront lump sum amount. This information was often not disclosed to the winning party in order to make the structured settlement plan more attractive. Most states now have disclosure laws that require the insurance companies to reveal the actual dollar amounts of both settlement options and all of the costs involved.