A structured settlement is the opposite of a lump-sum settlement. Structured settlements are broken up into regular payment installments that last for a certain period of time, often paid from an annuity. Courts may offer this as an option to victims who win a personal injury lawsuit, or they may award one without input from the plaintiff at all.
The benefits of receiving a structured settlement in a personal injury case include:
- A structured settlement may provide the injured party with a substantial tax benefit. Funds received from an annuity are tax-free as long as the injured party does not control the funds.
- Injured parties receiving lump sum settlements often spend everything within five years. Afterward, many become dependent on the government for their support. With a structured settlement, the funds are preserved throughout the time of disability.
- Annuity funds are managed by a professional. Some injured parties treat a lump-sum settlement like a windfall and promptly lose it.
- Annuities can be tailored to cover the injured party's specific needs and all sorts of future demands or contingencies.
- Annuities are, in most states, protected by state insurance laws that guarantee that obligations of a bankrupt insurer are covered.
- An annuity can be combined with a lump-sum payment to meet immediate expenses, such as medical bills, repayment of debts, rehabilitation costs, and the like.
- A structured settlement can dedicate funds to cover unanticipated advances in medicine, allowing for disabled parties to access the money they would need to access the most up-to-date treatments.
- A structured settlement may allow parties who are far apart in their settlement negotiations to close the chasm and make a good settlement possible.
There are, however, downsides to structured settlements for personal injury victims, which include:
- If the injured party retains too much control over the proceeds, the IRS may look at the situation and decide that the tax benefit must be forfeited.
- The injured party may fear that, no matter how the structured settlement protects against adverse economic conditions such as inflation or recession, unknown changes in the economy could make the annuity payments too small.
- Sometimes, the annuity is placed with brokers who do not have sufficient protection for insolvency.
- Insurance companies are reluctant to disclose how much they will have to pay to buy an annuity covering the amount of the settlement. A structured settlement frequently costs the insurer much less than it would to make a lump-sum settlement. The problem with this is that the injured party's personal injury attorney may not be able to make a complete assessment of the merits of the structured settlement offer.