If you’re in an accident and you’re injured because of someone else’s negligence, you may receive a settlement. If your loved one is hurt or killed in an accident, you might also receive a settlement. A settlement is something compensating victims and their families for injuries and accidents.
- A settlement might include economic damages and non-economic damages.
- Economic damages provide compensation for things you can calculate, such as present and future lost wages and the cost of medical care.
- Non-economic damages are compensation for losses that aren’t tangible but are still really like mental pain and suffering.
- Along the way, when discussing settlements, you might hear the term structured settlement.
- Many people aren’t sure what a structured settlement is, and whether or not it’s the right option for them.
The Basics Of A Structured Settlement:
If you are going through a civil case, you might settle it in a structured settlement. In a structured settlement, the plaintiff, who is the person who has been wronged, works with the defendant, who is the person or company who caused the harm, and they will usually also work with a consultant and a life insurance company.
Essentially, a structured settlement is a legal way to provide compensation to someone who’s been injured. The recipient of the settlement doesn’t get one large payout, and instead, they get awards paid in increments over a long period of time.
There are both pros and cons of a structured settlement to consider.
The steps can look like the following:
- A plaintiff brings a suit against the defendant for compensation for an injury, illness, or death caused by the defendant. After the defendant agrees to give the plaintiff money through a structured settlement to prevent the lawsuit from going to trial, the defendant and plaintiff work with the consultant or assignee to determine the specific terms of the structured settlement.
- Sometimes a judge will rule that a defendant has to set up a settlement.
- Certain things are determined, including how much regular payments should be, how long they should continue, and whether or not there are certain times there should be an increase in the payments.
- The qualified assignee then purchases an annuity from a life insurance company, and they create an annuity contract that matches the settlement. Once the annuity terms are set up, they can’t be changed. There may also be a lump sum side set aside to cover attorney fees or fund a trust.
There are different ways a structured settlement can be set up. For example, sometimes you might get a large initial payment not just to cover legal bills, but maybe also to pay off bills you have due, pay off a mortgage or make a big purchase.
- Then, after the lump sum, you might receive payments that serve as a lost income substitute.
- Some settlements will also provide higher amounts at certain times to pay what are called extraordinary amounts, such as college tuition.
- Some structured settlements might have payments that increase over time, while others might have payments that decrease over time.
What Are The Pros Of A Structured Settlement?
Some of the pros of a structured settlement include:
- One of the biggest reasons someone might opt for a structured settlement instead of a lump sum payout is because these payments don’t count as income for tax purposes, and this is true even if the settlement earns interest over time.
- If you earn income from structured settlement payments, it doesn’t affect eligibility for Social Security Disability, Medicaid, or other benefits.
- If the person receiving the structured settlement passes away prematurely, the contract’s heir can receive future payments tax-free.
- For some people, having a structured settlement is beneficial because it reduces the temptation to make big purchases, and it helps them better manage their finances without making large, unneeded purchases.
- As opposed to something like stocks or mutual funds, financial market instability doesn’t affect structured settlements.
- Payments are guaranteed, even if the insurance company were to go out of business.
- Structured settlements usually have yields that are more than what you’d get in interest on a lump sum payout.
What Are Some Of The Cons Of A Structured Settlement?
Along with the pros, there are cons of structured settlements to be cognizant of:
- After terms are finalized on a settlement, you can’t do much to change them. If your circumstances change, or the economy changes, for example, you can’t negotiate the terms.
- If you have an emergency, it can be challenging to access the funds that are part of a structured settlement, and if you identify investment opportunities with higher rates of return, you can’t use your full settlement.
- If you withdraw funds before 59 ½, you might have to pay IRS penalties.
- Certain aspects of a settlement like punitive damages are taxable.
- Inflation can be an issue with structured settlements. Over time, inflation can erode the value of the money, and it may mean that the payments are no longer adequate to cover expenses and bills.
Structured Settlements For Minors:
When it comes to minors, structured settlements are almost always how a cash settlement is set up.
With structured settlements for minors, there is a guarantee the child has money for the future.
Frequently structured settlements for minors stem from legal cases involving product liability claims, or a situation where a parent was severely injured or killed.
With a structured settlement for a minor, there are safeguards that prevent parents or guardians from having unrestricted use of funds and thereby spending the money irresponsibly. With a structured settlement for minors, the objective is to make sure that the child has money left after they turn 18.
If you’re unsure whether or not a structured settlement is good in your situation, you should speak with a legal professional as well as a financial professional who can help you understand your options and how to maximize your payout from a settlement.