Structured Settlement vs. Lump Sum

Types of personal injury settlements: structured vs. lump sumIf your personal injury case is nearing its end, you should begin thinking about how you would like to receive your settlement award. You can opt for a lump sum or a structured settlement. While, at first glance, the former option may seem like the most appealing, be forewarned that there are pros and cons to each type of settlement and it is in your best interests to run your situation by your financial advisor to see how best to manage your settlement award. Read below to find out about the advantages of a structured settlement versus the benefits of a lump sum.

How do lump sum and structured settlements work?

When you receive a settlement, it is vitally important to ensure your funds are handled carefully and appropriately. You do not want to risk squelching your money, nor do you want to have it tied up where you cannot access it when you need it. Many victims who receive personal injury settlements have little experience with large sums of money and have little to no background in managing substantial funds. This can cause a major dilemma because it can lead to regrets and future financial disappointments.

Many people opt for a lump sum award, also referred to as a “Compromise and Release,” in which they receive their entire settlement award at once. They have waited months or years for their check, they have a lot of past due bills to pay, and they want to maintain control of their money. When you choose a lump sum award, the defendant’s insurer will typically cut a check for the amount in full. Then, you will receive the entire settlement, minus legal fees.

Note: There may be tax implications to consider with a lump sum settlement award. You might need to set aside a portion of your check for income taxes. Your attorney or tax advisor can answer any questions you may have about associated taxes.

The other option is to receive your award in structured settlements. In this situation, the defendant’s insurance company usually funds an annuity policy on your behalf that gives you a continuous stream of income over a period of time. There is a lot of leeway in managing the payment options for structured plans. Annuities can be customized so that they can cover your current needs as well as a variety of your anticipated expenses. You can select a suitable plan to receive regular payments made in certain amounts over a specified amount of time that meets your needs and goals. These are usually tax-free; if not, the tax obligations may be decreased.

Should I choose a lump sum or a structured settlement?

The payment option you choose depends upon a variety of factors.

  • The type of case – If you sustained a high degree of disability (you will have a reduced earning capacity for a long period of time), if the settlement includes lost future income, or if there are minor beneficiaries in a wrongful death case, structured settlements might work better because they will guarantee you have the funds in the future when you really need them.
  • The amount of your settlement award – If your settlement is relatively small, a lump sum might be more suitable. However, “small” is a relative term and financial experts argue about the threshold. Some financial experts recommend opting for a lump sum if your settlement is under $150,000, whereas some finance companies manage annuities for personal injury victims whose settlements are $50,000 or less.
  • Current health condition – Life expectancy and current health condition are also factors to consider. In certain cases in which health and longevity are a concern, it might be more appropriate to receive the funds up front when you need them the most.
  • Current financial situation – Those who are in a large amount of debt may benefit from structured settlement because the funds will be better guarded from creditors. Conversely, if your financial portfolio is already strong, a lump sum might suit you best so that you can use the funds to invest as you see fit.

These are just a few of the factors that will need to be considered before deciding which type of settlement to choose. Again, we strongly encourage you to speak to an attorney before making your decision to avoid any unforeseen future pitfalls.

What are the pros and cons of each settlement type?

Lump sum payments allow you to have total control of your funds straightaway. You can be done with legal matters and have full access to your money at any time. On the other hand, it may encourage overspending because of a lack of financial planning.

Structured settlements give you the assurance of funds in the future, provide you with tax benefits, are managed by a financial professional, and can be devised to cover you future needs. There are drawbacks with this type of settlement option, too, though. It can be difficult to change a structured payment plan once you have signed up and the plan may not adequately account for inflation or a recession. There is also a lesser chance that you will give money away with a structured settlement. With a lump sum, you may feel that you need to help people monetarily, but with a structured settlement, it may not be possible.

Note: A third option might be practical for some victims, which provides a unique blend of benefits. In certain cases, claimants can choose a combination lump sum – structured settlement award, in which they receive a chunk of the money up front to pay for immediate needs and overdue injury-related bills, and then set the remaining funds up in a structured plan. Ask your attorney or financial advisor if this might be a good option for you.

Where can I learn more about personal injury settlements?

Pursue our library and blog for more informative articles about personal injury claims and settlements. You can also download our free accident guidebook, Don’t Crash Again! A Car Accident Victim’s Guide to Maximizing Recovery. This guide provides a host of exceptional tips for ensuring you get the highest dollar amount in your pocket when all is said and done.

In addition, if you have yet to hire an attorney for your case, call our personal injury lawyers at Cordisco & Saile LLC, serving New Jersey and Pennsylvania. We offer legal representation and counsel for all types of personal injury cases, and can explain which types of settlement might be right for your particular case. Contact us at your convenience to schedule a consultation at 215-642-2335.