Updated February 26, 2019
Many large personal injury awards and settlement amounts are often paid in part by means of a structured settlement. The way structured settlements work can vary, but usually the paying party purchases an annuity from an insurance company and the injured party receives payments over a period of years. The total amount of the structured settlement is general far more than what the injured party would receive with a straight cash settlement.
This arrangement can have both advantages and disadvantages, and the person receiving the payments has to carefully consider whether or not to accept a structured settlement.
The primary advantage of receiving a lump sum payment is liquidity. Someone suddenly has a whole lot of cash. Like with winning the lottery, this may or may not be a good situation, depending on the level of responsibility and financial knowledge of the person who controls the money. Statistics seem to indicate that most people spend through their lump sum settlements in a far shorter time than they would have received their annuity payments.
The primary advantage of a structured settlement, besides the limitations on profligacy, is the tax-free status of the earnings involved. All settlements are tax free, but if you invest that money and earn interest, that interest earned is taxable. The interest earned from the annuity of a properly structured settlement is not taxable; it is all considered a part of the settlement.
There are also disadvantages to a structured settlement. Although this will rarely happen, the future solvency of the paying party has to be taken into consideration. If the paying company goes broke, the victim may be out of luck.
Inflexibility is also an issue. Once the terms of a structured annuity payment are set, it can be very difficult to change the terms of payment. Also, the fixed payments may not factor in variables like inflation, while they will factor in increased age-risk ratios.
Additionally, unless the structured payments go into qualified funding vehicles like custodial accounts or trusts, the recipient of the annuity payments may permanently lose the ability to access public funds like Medicaid and Medicare.
If you or a loved one have been injured as a result of negligence, you are urged to contact the Indianapolis Personal Injury Attorneys of Wilson Kehoe Winingham. The lawyers at WKW can help you get the compensation you deserve. Call 317.920.6400 or fill out an online contact form for a free, no-obligation case evaluation.
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