Advantages and Disadvantages of Structured Settlements

Structured settlements, also known as periodic payments, are settlements paid over a period of time as a result of a lawsuit or insurance claim. This type of settlement is often preferred by both claimants and defendants because of its various advantages.

Advantages of a Structured Settlement

Financial Security:

The most attractive benefit from getting a structured settlement instead of a lump sum is that it offers financial security for the claimant. It offers the guarantee of a steady stream of income for the claimant, especially when the injury or illness sustained from the incident has rendered him or her unable to find a lucrative job. Moreover, future medical needs can also be incorporated in planning the terms of a structured settlement so that the claimant feels financially secure in the future.

Tax Free:

Structured settlements are free of tax liability in the Federal and State levels. The income stream that is generated from the settlement is not taxable and thus, the claimant receives periodic payments in full. This is in contrast to the lump sum payment because the latter is subject to tax liabilities.

Financial Risk Protection:

When a person receives a huge sum of money, say a million dollars, it would be very easy for him or her to spend the money carelessly. One million may look like it can last forever, but with a few thousands spent thoughtlessly, can pose financial risks in the future. Moreover, a lump sum is subject to taxes and expensive attorney’s fees so that the amount gets smaller in time. With a structured settlement, this problem can be avoided as the claimant will receive enough income regularly and the rest of the money is effectively managed to last for a lifetime or until a set period of time.

Savings for the Defendant:

While a structured settlement is generally advantageous for the claimant, it is ideal for the paying party as well. By choosing to pay via this option, the defendant does not have to pay the full amount of the settlement immediately. By purchasing an annuity for the settlement, the paying party does not have to pay the entire amount that the injured party receives.

Although the advantages of having a structured settlement over a lump sum can be very appealing, there are also disadvantages that some cannot deal with.

Finally, you can also opt to later cash in the annuity should you need a lump sum of money.

Disadvantages of a Structured Settlement

Locks the payments:

Some claimants will not want a structured settlement because it locks them into the payments when a sudden financial need happens. A structured settlement, once finalized, cannot be undone and the periodic payments cannot be claimed in advance. Moreover, future payments cannot be used as collateral for a loan, thus the claimants may feel trapped.

Limited investment options:

When a claimant wants to buy a house, a car or put up a business, the small amount received on a regular basis cannot fund for these expenses.

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