Victims of personal injury cases who either win or settle their cases can take their settlement as a series of payments over a period of time (a structured settlement) or as one lump sum. A variety of factors are considered when choosing between the two options, including whether assistance is needed to manage a large sum of money, how the funds will be spent, and your tax liability.
After Congress passed the Periodic Payment Settlement Act in the 1980s, structured settlements gained popularity. Each year, the National Structured Settlements Trade Association reports that around $6 billion in structured settlements are issued to plaintiffs.
How Personal Injury Structured Settlements Work
If there is only a small amount of money, a victim may be eligible to receive their settlement in one lump sum. Structured settlement annuities can be arranged for larger sums of money.
Taxes and long-term security are the key differences between the two annuity settlement options. The money you receive from a personal injury lawsuit is tax-free in most cases; however, you will be liable for dividends and taxes from the lump sum after the money is in your possession.
The defendant at-fault puts the structured settlement money towards an annuity. Annuities are financial products from an insurance company that, over time, guarantees regular payments to the plaintiff.
The agreement entails the number of payments that the defendant will pay to the plaintiff. When the money is spread out over a long period of time, the plaintiff will have a better guarantee of financial security in the future, whereas with a single payout, the money may already be spent.
Different Structured Settlement Options
Personal injury structured settlements can be designed by the plaintiff to provide them with money whenever they need it. There are several different options you can choose from:
- Delayed Payments: Plaintiffs can delay their awards or settlement until they are retired.
- Decreased Payments Over Time: Structured settlements can decrease over time if a plaintiff chooses to accept more money early on. If you expect your income to increase at some point, this could benefit you.
- Increased Payments Over Time: Structured settlements can be stepped up from year-to-year, ending higher after starting relatively low.
- Additional Money for Major Expenses: Some settlements can offer a yearly income, and plaintiffs can request additional money to pay for large expenses, such as college tuition.
- Large Initial Payments: If your bills have been mounting as a result of you being unemployed for some time, your structured settlements can be designed to provide you with a large initial payment that can be used to purchase new items (such as a new car), to pay off a mortgage, or to pay overdue bills. Any small payments you receive after that could substitute for any income you may have lost.
When Plaintiffs Use Structured Settlements
Individuals can receive structured settlements for a variety of reasons, including:
- Wrongful Death: Family members who may have lost a loved one in a wrongful death can receive a structured settlement. For instance, a family might be eligible to receive a tax-free settlement to replace any lost income after their loved one passes away.
- Medical Malpractice: A family of a deceased patient, or the patient themselves, can sue their provider for medical malpractice should they or their loved one become injured or die at the hands of a medical professional.
- Workers’ Compensation: Many employees are aware of what workers’ compensation is, as they can receive it if they become injured at their work. The money can be used for wage replacement, medical treatments, and other expenses while an employee recovers.
- Personal Injury Cases: Personal injury lawsuits are civil cases where an injured plaintiff files a lawsuit against the person responsible for harming them to recover damages. Structured settlements can help plaintiffs pay for any medical expenses or additional costs they may have due to their harm.
Personal Injury Structured Settlements: The Pros and Cons
There are benefits and risks associated with any financial settlement.
Structured Settlement Pros:
- The payments are tax-free.
- If a recipient dies, the heir can receive payments tax-free after their death.
- You can schedule the payments for any length of time, and they can be deferred for as long as the plaintiff wishes, or begin immediately. Future benefit increases and lump sum payouts can be included.
- Changes in the market do not affect structured settlements, unlike mutual funds, bonds, and stocks.
- Over time, the interest an annuity earns will likely yield more in a structured settlement than in a lump sum payout.
Structured Settlement Cons:
- If the terms are unsatisfactory, you won’t be able to alter them once they are finalized.
- In the event of an emergency, you may not be able to access the funds right away. Recipients cannot request lump sum payouts in other settlements that offer higher return rates.
- If you don’t sell your payments, it will cost you money if you attempt to tap into your structured settlement.
- Settlements that include punitive damages and attorney’s fees may be taxed.
- A recipient may end up owing a lot of money due to administrative fees.
Selling a Structured Settlement
If a plaintiff decides to request a lump sum instead of receiving their settlement in installments, part or all of their structured settlement annuity can be sold through The Legal Funding Group. Our team will help you through the complicated legal process of selling your structured settlement. We break the selling process down into manageable steps because we understand how intimidating court proceedings can be, especially for first-time sellers.
Several factors are taken into consideration regarding the present value of a structured settlement annuity, such as:
- The issuing insurance company’s creditworthiness
- Current interest rates
- Amount of the payments
- Time of disbursement
Additionally, before a personal injury structured settlement sale is finalized, it must be signed off by a judge. The plaintiffs must be able to present a reason to the judge for cashing in their structured settlement annuity.
After the above factors are reviewed by the company purchasing your settlement, they may make an offer on the annuity. Once the assignment is approved, and both parties have accepted the offer, a petition will be filed by the company in its state court to receive the annuity payments in exchange for a lump sum to the annuitant.