Should I take a structured settlement or a one-time lump sum payment?
(Everyone's personal financial situation is different, but here is one view and opinion.)
If you are involved with a legal decision, financial claim or insurance arrangement, the financing process to settle and resolve the claim can often take two forms. Either a one-time lump sum payment, or a long-term periodic series of deferred structured settlement payments. But which is best for your situation?
A structured settlement involves a financial or insurance arrangement which includes a periodic stream of payments, that a claimant or plaintiff accepts in order to resolve a personal injury claim or other legal case. They were first utilized in Canada and the United States during the 1970s as an alternative to lump sum payments and are now part of the statutory tort law of several common law countries.
A structured settlement is a deferred payment method for compensating injury victims, and is a voluntary agreement between the injury victim ( plaintiff ) and the defendant. The plaintiff will receive the monetary payout over the course of a number of years through this deferred payment agreement. Under a structured settlement, an injury victim does not receive compensation for their injuries in one lump sum, but rather, they will receive a stream of tax free payments designed to meet future expenses and living needs. This type of compensation method is becoming more popular in a wide variety of legal cases.
The benefits of a structured settlement over a lump-sum payment include the security of a guaranteed long-term income with deferred payments that are exempt from income taxes. The federal government encourages the use of structured settlements in personal injury cases. Structured settlements also attract support from plaintiff attorneys, state attorneys general, legislators, consumer and disability advocates.
Structured settlements can be ideally suited for cases with:
• Severe injury
• Wrongful death cases
• Persons with temporary or permanent disabilities
• Workers compensation cases
• Guardianship cases that may involves minors
Want to Sell Your Structured Settlement?
Not everyone benefits from a long-term payment situation and some may want or need a lump sum instead. The owner of a structured settlement, such as lottery winners, medical, insurance, accident and lawsuit settlement owners, can often sell their rights to the deferred payment stream, in exchange for a one time lump sum payment from a variety of financial institutions. All situations are different, and as with any legal issue, you should always consult your attorney.
Types of Structured Settlements
Designated Period / Period Certain Annuities:
Life Annuity:
Temporary Life Annuity:
Lump sum:
More Discussion on Structured Settlement Issues:
The economic benefit and tax issues in the structured settlement arrangement, as compared to a lump-sum settlement, arises because the Federal government forgoes taxation of the earnings component of each year's annual payment. Economists usually argue that such subsidies distort individual choice and lead to inefficient outcomes. Nevertheless, it can be argued that the choice of the lump sum settlement may create an externality, that is, a cost to taxpayers at large, not borne by the individual who chooses the lump sum settlement. Despite the implicit tax subsidy, the available evidence indicates that the majority of personal injury awards are paid as lump sum payments, not through structured settlement arrangements.
An individual's decision to sell his or her rights at a later date involves the same comparison the individual makes in initially agreeing to a structured settlement arrangement in lieu of a lump sum payment. The individual must weigh the value of the purchase price offered compared to the expected present discounted value of the income stream being sold. Issues arising from the transfer of structured settlement payment streams involve whether such sales are consistent with the purpose of the tax provisions, whether consumer protection or consumer freedom of economic choice is a more important policy, and whether the transfers should be stopped so as to eliminate present-law uncertainty as to their tax results.
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