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What is a structured settlement, and should you accept one?

On Behalf of | Jan 17, 2022 | Blog, Personal Injury |

If you file a personal injury claim for an injury you sustained as the result of another person’s negligence, you may find that your claim never makes it to trial. This is not uncommon.

Most personal injury cases settle outside of court during the negotiations process. If you accept a settlement, you agree to discontinue any further legal action in exchange for a guaranteed payment. That payment can come in one of two forms: either as a lump sum or via a structured settlement. FindLaw provides an overview of structured settlements and explores the pros and cons of each.

A brief overview of structured settlements

If you agree to a structured settlement, you agree to receive periodic payments over the course of several years or for the rest of your life. The number of payments you receive depends on the severity of your injuries. Typically, insurance companies and defendants offer structured settlements only in cases of serious and/or permanent injuries.

To pay a structured settlement, the defendant’s insurance company will fund an annuity policy on behalf of the plaintiff. The annuity will produce a continuous stream of income for the plaintiff for the duration of the settlement’s term.

The pros of structured settlements

A structured settlement can offer several benefits that you may not realize with a lump-sum payment. The main benefits are as follows:

  • You get the peace of mind that comes with a guaranteed income stream for a fixed period of time.
  • You may tailor your annuity payments to cover your specific needs, contingencies and future demands.
  • For the most part, the payments you receive will remain tax-free. However, the exception to this is if your payments include amounts for interest or punitive damages.
  • State and federal laws protect your payments in the event that the insurance company that produces your annuity goes bankrupt or defaults for any reason.
  • You may receive both a lump-sum payment and structured payments so that you can cover immediate costs, such as debt repayment, medical bills and rehabilitation costs.
  • You can dedicate a portion of your funds to pay for treatments that researchers have yet to develop.

The drawbacks of a structured settlement

Though structured settlements offer several benefits, they do come with a few pitfalls. For instance, many plaintiffs fear that future inflation will render their periodic payments too small. Others realize that structured settlements often cost insurance companies far less than lump-sum payments and, therefore, feel cheated. Finally, the IRS may tax certain parts of a settlement, such as punitive damages, purely emotional damages and attorney fees.

Before you accept any type of settlement, carefully weigh the pros and cons. Also, seek advice from a qualified professional.

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