After winning or settling a personal injury or workers’ compensation case, you’re probably relieved that you’ll be compensated for your damages and other expenses. What you may not realize is that now you face a choice: should you receive all the money at once, also called a lump sum payment, or opt to receive the money over time, also known as a structured settlement.
Both options have advantages and disadvantages to consider. They can impact your taxes, income, and long-term financial planning. It’s a lot to think about, but this guide will break it all down.
What Is a Structured Settlement?
A structured settlement, sometimes called a structured settlement annuity, is a way to receive compensation from your settlement. Instead of getting a single, lump sum payment, you’ll receive smaller, regular payments over time, like every week or month.
While the individual payments may be smaller, the advantage of a structured settlement is that it gives you the financial security you may not get otherwise. Think of it like a paycheck. Each week or month, you receive a small but predictable amount of money, allowing you to plan and budget accordingly.
Structured settlements are most common in personal injury claims, like a car accident, but can also be used for workers’ compensation, medical malpractice, and wrongful death cases.
How Do Structured Settlements Work?
All structured settlement agreements and structured settlement payments are voluntary, meaning both sides have to agree to the arrangement. Once that happens, the at-fault party transfers oversight of the settlement to a company (usually an insurance company) that specializes in structured settlement annuities and settlement payments.
While state laws vary, most structured settlement annuities must explain:
- How much each payment is and how many you’ll receive
- How long the structured payments will last
- Whether or not future payments will increase
- If you’ll receive a lump sum payout in the future
Advantages of Structured Settlements
At first glance, a structured settlement annuity may not seem like a good fit for your situation. You may want or even need the large lump sum right away to replace lost income and meet your current financial needs, like paying medical bills or other expenses.
However, accepting smaller payments for a longer time may be the better choice for your long-term financial goals and unique situation.
Ensures Future Income
Probably the biggest advantage of a structured settlement is that it guarantees a future income, providing you with the financial stability you may not otherwise have. This is especially important if you anticipate future medical bills or medical expenses due to ongoing needs or have long-term financial responsibilities, like a mortgage or student loan debt.
Tax-Free Payments
If your settlement is from a personal injury or wrongful death case, your structured settlement payments are tax-free. While that’s not always the case for structured settlements from other cases, you won’t have to pay taxes until you receive the payment.
Provide for Your Beneficiaries
Depending on how the settlement is invested and paid out, the money may outlive you. Fortunately, that money doesn’t disappear. You can assign a beneficiary to continue receiving your payments, ensuring you can care for your loved ones.
Flexible Payment Schedule
In some respects, the payments from a structured settlement are similar to getting a paycheck. You know that every week or month, the money will be transferred to you. However, unlike a paycheck, you have the flexibility to choose when and how often you’ll receive payments. You can receive payments now or wait a few years. And you can decide how long you want the payments to last, whether that’s a few years, 30 years, or even longer.
What’s more, not every payment has to be an equal amount. Structured settlements allow you to receive more or less, depending on your wants and needs.
The Money Grows
Finally, structured settlements are often invested in something safe and stable, allowing the original amount to grow over time. This often means you’ll receive more money in the long run compared to what you would have received had you taken the lump sum.
Disadvantages of Structured Settlements
For all of the advantages of a structured settlement, it isn’t right for everyone. Here are some of the downsides to consider before agreeing to one.
Hard to Modify
While structured settlements can be flexible, that flexibility only exists before you enter into the agreement. Once it’s executed, modifying the terms of a structured settlement is difficult, even when your circumstances change, and the current terms no longer meet your needs.
Not Liquid
Unlike your personal investments or even your checking account, a structured settlement isn’t liquid. If there’s a financial emergency and you need some quick cash, you won’t be able to get it outside of your regularly scheduled payment, even if there’s more than enough left in the settlement to cover what you need.
Not Everything Is Tax Free
While settlement payments are tax-free for personal injury and wrongful death cases, other payments are not tax-free, no matter the claim. Additional money that’s paid to you, such as punitive damages or lawyers’ fees, is not necessarily tax-free.
Inflation
One overlooked but significant disadvantage of structured settlement annuities is inflation.
As a rule, you’ll know exactly how much you’ll receive every payment. While you know how much that payment is worth today and what you can buy with it, what you can’t know is how much that payment will be worth in the future and what you’ll be able to buy with it then. A single dollar today is worth much less than the same dollar in the future due to inflation, interest rates, and other economic factors.
Because structured settlement payments are small amounts over time, if the current payments are too low, you’ll get less value out of each payment over time, even if the amount seems high right now.
One way to account for this is with a calculation called discounted present value, which determines what a future payment is worth in today’s dollars. The result helps structure the annuity payments accordingly, but an incorrect calculation could cost you.
How Do Structured Settlements Work in Washington State?
Washington State’s Structured Settlement Protection Act sets the rules for all structured settlements. At least three days before a structured settlement agreement is executed, you must receive disclosures that include:
- A payment schedule that details the amount of every payment and the date of the payment
- What the total value of the payments is
- Information about the discounted present value of the payments
- A list of itemized expenses
- A list of penalties if you breach the settlement agreement
- Notification that you have the right to cancel the structured settlement agreement within three days without penalty
It’s important to note that even if both sides agree to a structured settlement, there’s no guarantee that the court will agree to it. The judge (or other responsible authority) must approve the agreement and find that it’s in the payee’s best interest to enter into a structured settlement.
And if your structured settlement is approved, you have to provide proof that you’ve been advised to speak with an independent financial advisor about the pros and cons of a structured settlement and received that advice. Alternatively, you can provide written proof that you choose not to talk to a financial advisor about the structured settlement.
Walthew Law Firm Can Help
Agreeing to a structured settlement can make sense for many people. It can provide long-term income that helps pay for medical expenses and other bills while providing ongoing compensation you can count on. But it’s critical to speak with a qualified financial advisor first, so you understand how taxes and inflation will impact your payments.
No matter what kind of personal injury or workers’ compensation case you’re pursuing, Walthew Law Firm can help. We’ll fight on your behalf to ensure you receive the fair and just compensation you’re entitled to, whether you take that as a lump sum payment or a structured settlement. Contact us today for a free, no-obligation consultation.