Is a Lump Sum or Structured Settlement Better
If you file a personal injury suit in court requesting compensation and the court rules in your favor, the other party is obliged to settle per the terms of the court agreement. The payment can be paid in a few ways, including either a lump sum or a structured settlement. The pros and cons of each should determine how you would like to be paid. Below are the pros and cons of both structured settlement and lump sum.
This is a settlement where the money is paid in instalments for an agreed period, maybe years or months. The parties come to an agreement and the money is paid out almost always by way of an annuity set up with an insurance company. It is usually used for larger settlements.
A structured settlement is almost always tax-free. Some structured settlement companies may charge different fees dependent on the arrangements of the agreement.
It encourages money management, saving, and spending adequately since one will receive a small amount of money after an agreed period. It also helps avoid making poor investment decisions.
A structured settlement allows a steady flow of income since one is sure they will receive the agreed upon sum of money on time. Depending on the agreed payment period, one can plan their spending to coincide with the time of payment.
The plaintiff will not be able to access the entire value of their settlement if any unexpected expenses or investment opportunities arise.
You are locked into the payment schedule as agreed upon at the time of the settlement. The only way to access the value of your settlement is to sell the future payments to one of the structured settlement companies.
Lump sum settlement
This type of settlement is where the beneficiary receives the total settlement pay-out all at once. It is usually used for minimal or moderate compensation situations.
A lump sum settlement gives you the freedom to control where and how a certain amount of money should be used. You can manage your investments and cater to unexpected expenses easily, unlike in structured settlements, where you have to wait for some time to get your cash.
It can potentially benefit critically injured beneficiaries who require enough funds to cater to their costly treatment and medical bills which could vary over time depending on how their health fluctuates. Their recommended treatments and living accommodations could change over time requiring access to a larger sum of money than initially thought at the time of the settlement occurring.
The beneficiary could also see nice financial growth if the money is invested in things that see nice value gains.
Receiving a lump sum of money, especially for people used to handling a small amount, can lead to mismanagement and spending the money on unnecessary things.
Investing a large sum of money all at once has the potential to be a good thing, should the investments go in a positive direction. Still, it can lead to significant losses if the investment goes unexpectedly, unlike in structured settlement where you would only be able to invest a smaller amount based on your annuity payment schedule and decide to reinvest depending on the initial investment results.
Both structured settlements and lump sums can be beneficial depending on your situation. If you are locked into a structured settlement and find yourself in need of a larger lump sum you can always attempt to sell your future payments to a structured settlement company which would require court approval.