The total number of structured settlements in the United States for 2019 exceeded $6.4 billion. The majority of these reflect the outcome of personal injury lawsuits. Every year, these lawsuits award over $250 billion to claimants, many of whom decide to take periodic payments.
Structured settlements can be a good way to effectively manage what is often a sudden financial windfall. However, although these settlements help many claimants avoid the temptation of extravagant spending, there is still a lot that you should be aware of when receiving them.
If you’ve recently received a structured settlement and you’re not sure about the options available to you, read on to find out some important structured settlement information.
What Are Structured Settlements?
A structured settlement is one of two arrangements you can choose after the resolution of a personal injury claim. Settlements are usually decided after extensive negotiations over the details of the payment amount.
Structured settlements entail a sequence of payments over a specific period of time. The alternative is receiving one large sum of money or a lump sum.
How Structured Settlements Work
One of the great things about structured settlements is that you can design them to suit your personal financial needs. There are a few options you can choose to ensure you receive adequate sums of money when you need it. Here are a few:
Increased payments allow you to raise the amount paid overtime. Usually, this means starting with lower payments and then have them gradually increased every year.
Decreased payments are the opposite of the above. You start by getting a large sum that gradually decreases over time. This arrangement is usually put in place if there’s an expectation that your future income will increase.
Large First Payment
This involves one large sum when the settlement payments begin. You might opt to do this if you’re unemployed due to an injury and unable to pay your bills. This arrangement allows you to clear any overdue payments once you receive your settlement.
Once you overcome this hurdle you’ll be better able to manage receiving smaller payments for the duration of the settlement period. These payments can replace lost income.
If you’re financially comfortable with your current income, you may choose to use any money awarded as an alternative form of savings. You can forego receiving it, and instead choose to receive payments when you retire.
The settlement may include payments to assist with expenses considered extraordinary, such as college tuition. These payments are in addition to the specific amounts paid via the settlement that provides a yearly income.
Benefits of Structured Settlements
Designing a settlement that suits your financial needs is just one of the benefits of a structured settlement. Here are a few other advantages structured settlements can provide:
- It’s not accessible by ex-spouses during a divorce settlement
- It’s not accessible by creditors
- Helps you to better manage your money
- Some can acquire interest
These are just a few benefits of structured settlements. Here are some other facts you should know.
5 Structured Settlement Facts
A structured settlement might be the perfect option for you. But before you decide, here are a few facts about structured settlements you should also know before making your final decision.
1. Tax-Free Payments
Unlike lump sum payments, structured settlement payments are tax-free. Lump sums are taxed as income, so you will lose a portion of it toward taxes.
The company involved in your settlement will more than likely purchase an annuity to pay your structured settlement. Because you don’t control the annuity, your payments won’t be taxed. This provides the assurance that you’ll receive more money than a lump sum would provide.
2. A Source of Income
When you receive payments over time, as with a structured settlement, it becomes a source of guaranteed income. This isn’t the case with a lumpsum payment. Settlements also facilitate better management of the money as you receive it.
Structured settlements provide flexibility. There are many options to consider when you agree to receive a settlement. Before signing any related paperwork, know your options.
Discuss them with a professional so that you receive your payments in a way that works best for you. Take the time to decide while you have the opportunity to, as it is very difficult, to the point of impossible, to change the terms of a settlement.
4. Inflation Isn’t Considered
Unfortunately, structured settlements are not adjusted for inflation or any economic fluctuations. Keep this in mind, as changes in the economy are inevitable. One way to do this is arranging to have future payments increased over time.
5. Selling Is an Option
A settlement might seem like an either-or situation – structured payments or a lump sum. But there is a third option. After choosing a structured settlement you can sell it.
Because a settlement arrangement is difficult to alter, selling it becomes an option if you change your mind, or if the payout terms are not working for you. You can sell your structured settlement and receive a lump sum payment. You can use the cash received to pay your debts, for an unforeseen emergency or any other financial obligations.
If this is something you’re considering, you can find more information on companies that provide this service.
An Opportunity to Make a Wise Financial Choice
Ironically, often the circumstances that lead to having to decide on receiving a structured settlement or lump sum may not be the best. It might involve dealing with an injury that affected your income. However, any type of compensation will go a long way to helping you on your road to recovery.
Structured settlements provide an opportunity to choose what’s financially best for your future. Whatever you choose, it’s always wise to plan and get financial advice, if possible, to ensure you use your money wisely. You can also visit our Personal Finance section for additional financial guidance.