by Susan Paige
Do you know what happens after you win your personal injury claim? Or what happens if you agree to settle?
You know you should receive some money, but how exactly does that work? No one is going to walk up to you and hand you a bag of cash.
A structured settlement might be offered as an option. Before you choose between a lump sum and a structured settlement, you should know what you are choosing between.
Keep reading to learn all about structured settlements and how they could benefit you.
What Is a Structured Settlement
When injured plaintiffs win their case, they are typically presented with two options. They can take their payment in one large lump sum. Or they can take a series of smaller payments for a specified period of time.
Which option you choose depends on your tax liability, ability to manage money, and how you intend to use the money.
How Structured Settlements Work
When plaintiffs agree to structured settlements, they will receive a specific sum of money for a predetermined period of time. You have a few different options when it comes to how you receive your payments.
Large Initial Payment
With this setup, you will receive a large initial payment and then smaller amounts following. This is a smart choice if you are unemployed and have large debts piling up.
The sizeable initial payment lets you get caught up on bills. Then the smaller following payment can act as a substitute paycheck.
Additional Payment for Extra Expenses
Think of this settlement payment structure as a yearly income. You will receive a certain amount each year.
Then you will receive extra money for specific expenses. For example, this could be the cost of college tuition.
You could agree to have low payment right away that gradually increase in value. This means you’ll start with less money now, but over the long run, you will feel less pressure financially.
If you think your income will increase in the long term, you could agree to decreasing payments. This can be useful if you need the financial help right now but know you will recover and go back to work.
If you don’t need the money right now, you could delay the payment of your settlement until retirement. This gives you a boost to your financial retirement plan.
Drawbacks of a Structured Settlement
Once you agree to the terms of your settlement, there is no changing it. If the terms no longer work for you, you will end up selling the settlement to get your money and avoid large penalty payments to cash out early.
Insurance companies charge to set up your structured settlement or lump-sum annuity. This can cause you to lose a significant amount of your settlement award.
Consider Structured Settlements
If you face the choice between a lump sum and a structured settlement, you need to consider your current financial situation and the potential tax implications of each.
If you think structured settlements are the better way to go, you need to determine what type of structure is best for your situation. Think about your current and future financial situation.
Check out our other financial articles to learn how to save and invest your payments.