Oftentimes, after you win a lawsuit, you’re offered a choice of either a structured settlement or a lump sum payment. These forms of payment are entirely different, and each come with their own benefits and drawbacks. If you’ve been offered a structured settlement (or your lawyer thinks you may be), read on to learn the pros and cons of a structured settlement.
What Is a Structured Settlement?
Simply put, a structured settlement is a payout that takes place over a period of time. While there is no set period, you should expect something to the tune of “every month for the next 25 years.” These installments come free of income tax, as they have been exempted under state and federal income tax laws.
Structured settlements are designed to be especially useful for plaintiffs who suffered a permanent or lasting injury, as the monthly payments can go toward regular medical bills.
What Are Lump Sum Payments?
The other type of settlement is a lump-sum settlement, which is exactly what it sounds like. While structured settlements offer payments over a long span of time, lump-sum settlements offer you one singular payment. This is a much simpler payment, as you receive your money all at once, and what you do from there is up to you.
Like structured settlements, there are benefits and drawbacks of choosing the lump sum payment. The biggest benefit of a lump sum payment is that you can immediately meet your needs, and you’re better suited to meeting unexpected needs, too.
If, during one month of your structured settlement, a tree falls on your house, your structured settlement payments won’t suddenly increase to meet the new demand. With a lump sum, on the other hand, you can easily use your money to address things as they come up.
People prefer lump sum payments if they do not have an injury that will cause problems for years to come. If the damages you suffered were immediately treatable and you’re already back on your feet, you can use the lump sum however you’d like. Since you don’t need to worry about ongoing medical bills, there’s no reason you can’t use the money to save for the future or splurge on something new and exciting.
Additionally, lump sum payments are better for investors. Because you’re given a large check, you can put that money into an investment and watch it grow much more easily than you can with small payments.
Unfortunately, lump sum payments also come with disadvantages. For instance, once you spend the money in your lump sum, you won’t get any more. You might be excited and buy something big, only for your injury to suddenly worsen, then you’re left without a way to pay the new medical bills.
Many people find it difficult to avoid spending their lump sum—it’s just human nature. If you’ve had problems with money management in the past, a lump sum settlement may not be best for you.
Additionally, there’s no guarantee that the investments you make will perform well. If the market crashes, your lump sum money may shrink more than you were expecting.
Structured Settlement Lump-Sum Hybrid Agreement
In some (quite specific) cases, you may get an offer for a structured settlement lump-sum hybrid agreement. When this happens, your settlement begins with a large lump sum (typically to address your immediate financial needs), after which the remainder of the payments come through as a structured settlement.
This compromise is a great option for many people, so talk to your lawyer if this sounds like the best of both worlds.
Can You Turn a Structured Settlement Into a Lump Sum?
To make a long story short, you can turn a structured settlement into a lump-sum payment, but you need to be careful and thoughtful if you choose this option. If unexpected bills crop up or you need to immediately purchase a new home or vehicle, you can find companies that purchase structured settlement payments for a lump sum.
However, you need to keep in mind all the cons that come with a lump sum—you took the structured settlement for a reason. If a lump sum payment will prevent you from getting the ongoing medical help you need, you may want to consider alternatives before taking the lump sum payment.
Structured Settlement Pros
Now that you know a bit more about structured settlements, let’s take a closer look at the advantages and disadvantages they offer.
Taxes are generally significantly reduced or eliminated with a structured settlement, which means you get to keep more of your money. With a lump sum payment, you’re forced to pay income taxes, which can go as high as 30 percent. That means if you win $10,000, you may have to fork over $3,000 to the government.
Structured settlements also come with built-in money management. Because you’re definitely getting the agreed-upon monthly payment, and no more, there’s no way for you to get more in a given month. Whether you’ve had issues with money management in the past or you’d rather not face the temptation of a large sum of money, structured settlements can be very helpful.
More Money (Potentially)
Structured settlements may also leave you with more money than if you go with a lump sum payment. When you look at the terms of each agreement, the initial sound of a lump sum may be better. After all, $1.5 million dollars all at once is a lot of money. However, $5,000 a month for 30 years is $1.8 million dollars, so you need to weigh the benefits of a lot of money all at once or more money spread out.
Structured Settlement Cons
There are a few downsides to structured settlements, too.
The sheer act of waiting is a significant downside for some people. We live in a world of immediate gratification, and when you spend months or years on a lawsuit, sometimes you want to see the reward all at once.
On top of that, unexpected bills can make a structured settlement a lot less appealing. $5,000 a month isn’t as useful when your child needs a $50,000 surgery right now. If you can, do your best to set money aside each month so that you can weather the storms of unexpected bills.
Now that you know the pros and cons of a structured settlement, talk with your lawyer about what type of settlement is best for you. Additionally, if you feel that the settlement is far off, you can always reach out to Apogee Capital Partners to discuss pre- or post-settlement legal funding.