When it comes to personal injury and accident lawsuits, most of them never see the inside of a court room because both parties choose to reach a fair and equitable settlement. How this works is the plaintiff (the person who suffered the injury) agrees to stop any current or future legal action against the defendant (the person who caused the injury, or the defendant’s insurance company), in exchange for financial payment. This is also called a “settlement payment,” and this payment can be in a lump-sum (the entire value of the agreed amount) or it can be received in a structured settlement, which gives the plaintiff monthly payments over a period of time. If you have one of these, you may come to a point where you think you’d be better off with a lump sum, instead of monthly payments. Read on if that’s you and you’re thinking, “I need to sell my structured settlement payments.”
The “period of time” the payments are made is based on the circumstances of the accident and how badly the plaintiff was injured. Normally, the period is 10, 20, or 30 years with the option of allowing the plaintiff to name a beneficiary in case they pass away before the structured settlement payments have been fully completed. However, there are occurrences where an amount is agreed to be paid monthly for the rest of the defendant’s life. If the defendant passes away, the payments stop and no beneficiary can be named.
In what is referred to as a catastrophic injury, the payments not only go to the defendant’s monthly living expenses but are also for expected ongoing medical costs. When the defendant chooses a structured settlement as a payment option for the settlement of the lawsuit, they agree to waive future rights to sue. This must be carefully weighed when it comes to rising medical costs. A procedure today could cost $500.00 per week, but ten years from now, it could be $3,000.00. If these facts are not taken into consideration, you could be looking at a time where you can no longer afford to pay for your medical treatments.
Who sets up the structured settlement? The majority of the time the defendant’s insurer typically funds an annuity policy payable to the plaintiff. An annuity produces a continuous and consistent stream of income over the agreed time frame of the annuity or structured settlement. Annuity contracts can be quite complex to cover a variety of expected expenses, including medical expenses.
Never accept any settlement agreement before you have been able to have a complete discussion with a tax attorney, personal injury attorney or certified public accountant (CPA) to fully explore all current and possible future tax consequences of accepting the settlement offer which has been presented to you.
The following are the top Pros and Cons of Structured Settlements.
1) A structured settlement can provide a plaintiff with substantial tax benefits because personal injury settlements are considered to be “tax-free” under the IRS U.S. Tax Code. However, there may be some exceptions which can apply and could make certain portions of an accepted settlement taxable. For example, if punitive damages are received or if interest income accrues on the settlement, those can be taxable. It is a good idea that you speak to a qualified attorney to fully understand the tax implications of the settlement offer you have received.
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2) Structured settlements offer plaintiffs the certainty of payments over a fixed period of time. However, lump-sum payments may be better suited for cases which involve minors. The reason for this is it allows for long-term investing, which can pay for many significant “big ticket” items such as a college education or a first home. For those suffering from a debilitating injury that will require future medical expenses, getting the money up-front to be able to invest can bring a greater return and give the plaintiff a healthier financial situation.
3) Parties may tailor annuities to cover a plaintiff’s specific needs and all sorts of future demands or contingencies.
4) In most states, annuities are protected by state insurance laws which guarantee that the obligations of an insurer will be covered. According to federal law, it doesn’t allow an insurer to declare “bankruptcy” formerly; most states in the US have what is called “a safety net” for insurance companies that become insolvent. That is, insurance companies and policy claims will continue to be covered and paid by the home state’s guaranty association, which is subject to state limits.
5) There can be a combination given at the time of settlement, a lump-sum payment, and a structured settlement. The reason for this is to allow the plaintiff to meet many large immediate expenses, such as medical bills, repayment of debts, rehabilitation costs, etc. and to have ongoing payments for living expenses and further treatment.
6) Parties can dedicate funds of a structured settlement to cover unanticipated advances in medicine so that if medical science develops a miracle cure, the plaintiff can give it a try.
7) A structured settlement is a great tool that can help the settlement negotiations if they currently aren’t going too well, or if the sides are far apart in their offerings. This can allow both parties to reach an agreement which is acceptable to both the plaintiff and the defendant.
1) Certain parts of a settlement, whether a lump sum payment or a structured settlement, can be taxed, including punitive damages, some attorney’s fees, purely emotional damages not stemming from physical injury, and more.
2) A plaintiff’s fear is that, no matter how solid the settlement protects against possible negative economic conditions such as inflation or recession, there can be unknown changes in the economy which could make the annuity payments too small to cover the expenses they were intended to cover.
3) For obvious reasons, in years past, there were insurance companies which were reluctant to disclose how much they would agree to pay to buy an annuity. They saw this as taking away their competitive advantage with other companies and also setting a precedent on future cases which put them between a rock and a hard place often. One of the big advantages of a structured settlement for the defendant is that it is a lesser cost than making a lump-sum settlement offer. Without this information, the plaintiff’s attorney was not be able to make a complete assessment of the benefits and drawbacks of a settlement offer. Today, however, most states, such as New York and Florida, have some form of a disclosure law known as a “Structured Settlement Protection Act” (SSPA). These laws require insurers to be upfront about their costs.
Your Next Step: Get a Free Case Review by a Qualified Agent
Before you make a life-changing decision about either accepting an offer, cashing in your annuity or structured settlement, or selling a portion of your monthly payments, contact us for a free case review. We will assess your current situation, your future financial situation, and which options work best for you right now and also in the future. An understanding of fees, interest, present-day value and future value are important to your financial and emotional health. Money can be a source of great stress, and we want to make sure you have as little stress as possible.