Structured vs. Lump Sum Personal Injury Settlements

It can take a good amount of time and fortitude to resolve a personal injury claim or lawsuit. And you will definitely breathe a huge sigh of relief when your case concludes and payday comes. Your personal injury settlement compensates you for all of the expenses you have accrued because of your injury, as well as your future injury-related needs. If the settlement is substantial, it is important to ensure that you will appropriately use and carefully manage the funds.

Before you receive your payment, you must decide which type of payout option you would like: a lump sum or a structured settlement. Below is a brief overview of how each type of settlement works and when they are most suitable. Because your decision can affect your finances for years to come, we highly recommend speaking to a personal injury attorney before making your election.

To speak to an attorney about settlement options in Pennsylvania, you can call Cordisco & Saile LLC at 215-642-2335 and request a free consultation.

How does a lump sum settlement work?

Lump sums are pretty much just that: all of your settlement in one single payment. These types of awards, also referred to as “Compromises and Releases,” give you 100 percent control of all of your funds in one fell swoop. When you choose a lump sum payment, the defendant’s insurance company will cut you a check in the full amount of the final award.

It is quite understandable why many injury victims opt for this type of settlement. After all, they have bills to pay, they may have loans to pay back, and they have waited a long time to settle their case. Note: If you are financially struggling and are still awaiting your settlement, you might want to speak to a lawyer about settlement funding options.

But, before you jump the gun and elect a lump sum, there are several things to consider.

  • Financial savviness – Do you really want complete control over a large sum? Have you ever had experience handling huge chunks of money? Many people simply do not know how to carefully manage a large sum of money, or how to maximize it or plan for future needs. It might be better to allow a professional to handle the funds, or to opt for a structured settlement if you do not feel comfortable handling the money.
  • Taxes – There are certain tax implications with lump sum settlements; you probably will need to set aside a portion of your settlement for Uncle Sam. Tax considerations are beyond the scope of this article, but we highly recommend speaking with an attorney or tax professional about tallying taxes for your settlement.
  • Legal fees – When figuring out how much money you will actually pocket when your settlement is over, remember that the final lump sum check you receive will be the total award minus any associated legal fees.

How does a structured settlement work?

Structured settlements are a very useful tool for managing and appropriating large amounts of funds. When you opt for a structured settlement, you select a suitable plan that provides you with a steady stream of income over a given period of time.

The defendant’s insurer will fund an annuity policy on your behalf, and you will receive your payments each month directly from the provider, rather than an initial lump sum. In most cases, the insurer will pay your medical providers and legal fees out of the initial settlement, and then fund the annuity with the remaining amount. For example, rather than receiving a $75,000 award up front, you might opt for a plan in which the insurer will pay off $25,000 of your medical expenses and $25,000 to your lawyer, and then purchase an interest-earning $25,000 annuity on your behalf. You could then elect to receive, say $600 a month until the insurer fully compensates you.

Structured settlements are a popular option, particularly among claimants who have sustained long-term or permanent disabilities, and therefore have a lot of future needs to plan for.

There is really only one pitfall to structured settlements; you forgo immediate control of your money, and once you sign a structured settlement plan, you cannot change it. The benefits, however, are worthy of consideration.

  • Taxes – Structured settlements are usually either tax-free or tax-deferred or at least provide tax breaks.
  • Flexibility – These types of settlements are very flexible and there are numerous ways to personalize the plan to suit your current and anticipated individual needs. You can even opt for a blended lump sum/structured plan in which you receive a large portion of your funds up front, then receive the remaining funds in monthly payments.
  • Protection – With structured settlements, you will have peace of mind that the money will be there for you when you need it. You do not need to worry as much about irresponsible spending or squelching funds you will need in the future. In addition, annuities are a relatively low-risk, government-backed way to invest funds. In other words, they are a safe, predictable way to handle your assets – with little to no surprises.

Which type of settlement is right for me?

Each person’s needs are different; the right election for you may differ from the next claimant. There a few factors to consider when deciding which payment option to choose.

  • Amount of the award – If your settlement is not very substantial, choosing a lump sum settlement award may be suitable. The question is – what do you consider “substantial?” It is a relative term. For instance, one claimant may think $50,000 is substantial, while another may think $200,000 is not. As a general rule of thumb, if the thought of handling your settlement award is overwhelming, you probably want to opt for a structured settlement.
  • Future needs – If you have a lot of anticipated future needs (medical, lost wages, etc.), structured settlements are usually the way to go. You need some type of guarantee that you will have the funds available when you need them.
  • Life expectancy – If your condition is such that future health and longevity is a concern, lump sums may be a better option so you can use the money straightaway.
  • Debts – If you have a large amount of debts, you will want to consider choosing structured settlements because you will be able to better protect your funds from creditors. On the other hand, if your credit and financial situation are in good standing and you are financially savvy, then a lump sum may be wiser because you might be able invest the funds in even more profitable ways than an annuity.

These are only a few of the things to keep in mind when deciding on the type of settlement you want. Your attorney or financial advisor will be better able to determine exactly what would be best for your unique situation.

Can Cordisco & Saile LLC assist me with my personal injury case?

Our team at Cordisco & Saile LLC has been helping personal injury victims in Pennsylvania for over 25 years. We can help you resolve your claim or suit, and assist you when deciding on your settlement payment options. If your case involved an auto accident, you might also benefit from reading our free guide to car accident settlements, Don’t Crash Again! A Car Accident Victim’s Guide to Maximizing Recovery.

Contact us today at 215-791-8911 for a free one-on-one consult with a personal injury lawyer.