Many times when a personal injury lawsuit is decided in a court of law, the plaintiff will opt for a structured settlement. This can be a great option for many reasons, but it is important to know it’s limitations before deciding to have a structured settlement set in place. While a structured settlement may be a popular option, it is not an ideal option for everyone.
With nearly six billion dollars each year put into structured settlements in the US, structured settlements have been popular since Congress passed the Periodic Payments Settlement Act in 1982, which made structured settlements a more secure, tax free option. Many people who’ve received financial compensation after a spinal cord injury will opt for a structured settlement plan because it gives them a more secure future.
How a Structured Settlement Works
Typically, a structured settlement pays a certain amount of money each month, which is decided in court, and once this is decided it cannot be changed. This financial agreement is called an annuity. This is why it’s important to make sure a structured settlement annuity is what you need and want over the lifespan of the beneficiary. If larger purchases are required or if emergencies arise, the funds in a structured settlement cannot be used.
One of the main benefits of a structured settlement is that they are tax-free. For example if you choose a lump-sum payment after a lawsuit, that money will be taxed once it is yours. However when you receive monthly payments for a structured settlement annuity, this will remain tax free for its entire entirety.
Structured settlements can accrue interest, which is ideal if you choose to delay them until a later date, which is common for people who are injured at a younger age and want to work. This can assure you will have the money you need to live comfortably as you age. For many people however, they need their payments right away to pay for medical costs insurance does not cover, as well as specialized physical therapy and equipment.
When you set up your structured settlement annuity, you can also make sure that the payments remain the same overtime, or you can change the payments at a certain date. For example, some structured settlement annuities will pay out twice a month instead of once a month as a person ages. Additionally, a structured settlement can be paid out during your entire life span, or you can have it set-up to where it is paid over a set number of years.
While a structured settlement may sound limiting, remember that over time you will receive more money from a structured settlement annuity. The interest you receive plus the payout is usually more than a lump-sum payment.
Limitations of a Structured Settlement
As stated above, a structured settlement can be limiting. Once it is finalized, it is set in stone and cannot be renegotiated. If you try to use your structured settlement money the IRS will penalize you and make you pay “surrender charges.” Also, if a structured settlement is used to pay for attorneys’ fees, that can be taxed. And if you live in a state that doesn’t require insurance companies to share the costs associated with setting up a structured settlement, they could charge you a large sum of money due to “administrative fees.”
Lastly, while it is possible to go through companies that offer “structured settlement loans,” know that these companies are purchasing your settlement, which will halt your regular payments. A judge must approve the sale as well. Please contact us if you have any questions regarding your particular situation/injury and to know your options for deciding on a structured settlement.