When a personal injury case settles, or achieves a successful settlement between an insurance company and claimant, there are two main payment options: a structured settlement or lump sum.
It is important to consider both options with a personal injury lawyer before making your choice.
One type is likely better for your specific needs and goals than the other.
Understanding Personal Injury Settlement Payment Options
While most of the hard work and decision-making is over by the time you achieve a personal injury settlement, it is crucial to take the time to understand your payout options and select the right one for you.
Settlement payment structure matters, as it can determine how much you get paid and when. This can impact how you plan for your future.
What Are Structured Settlements in Personal Injury Cases?
In a structured settlement, the payment from the insurance company is spaced out into installments that occur over time, such as monthly or annually.
A structured settlement can continue to pay the claimant for a set amount of time or for life.
In some cases, these settlements also include a larger amount upfront for immediate needs, such as outstanding medical bills.
How Lump Sum Settlements Work for Injury Victims
A lump sum settlement pays the claimant the entire amount upfront. It pays the settlement in one payment, usually right after the agreement is finalized.
With a lump sum settlement, you can take the full amount and do what you want with it without having to wait for additional payments.
Structured Settlements: Benefits and Considerations
There are pros and cons to consider with both a structured and a lump sum settlement.
With a structured settlement, the benefits typically revolve around a greater ability to budget and make the settlement money last longer.
The pros of a structured settlement include:
- A stable, guaranteed income stream for life or a set period
- Protection against poor financial decisions
- Tax advantages and benefits that can often keep the settlement tax-free
- Inflation protection options to maintain your purchasing power over time
A structured settlement can be designed to meet the claimant’s individual needs. It can have increasing payments to account for rising costs, for example, or an initial larger payment.
Structured settlements are often managed through a third-party insurance company that distributes the payout according to the agreed-upon schedule.
Potential Drawbacks of Structured Payment Plans
While a structured settlement has certain advantages, there are also potential drawbacks.
For instance, these settlements are inflexible. Once they are finalized, the terms and payment schedule typically cannot be altered.
You do not have control over the money; the insurance company does.
In addition, setting up a structured settlement that meets your needs can be complex. You may require help from an attorney.
Lump Sum Settlements: Advantages and Risks
A lump sum settlement also has benefits and drawbacks.
This option grants you immediate access to the full amount of your settlement, which can be helpful if you have serious injuries with a lot of expenses that need to be paid right away.
Accessing the full settlement can give you the flexibility to address your current financial needs.
The downside of a lump sum settlement is that you will be responsible for managing your money so that it lasts and continues to cover all of your needs.
It is important to manage your money carefully to ensure that you do not prematurely run out.
Another drawback is that you may receive a smaller amount of money than with a structured settlement, because the defendant may not be able to pay the full settlement upfront.
Tax Considerations for Personal Injury Settlements
You must take taxes into consideration when deciding whether to choose a structured settlement vs. a lump sum.
In general, personal injury settlements and judgment awards are not subject to federal taxation.
However, there are exceptions for certain parts of a settlement, such as punitive damages and medical expenses that have been listed as deductions in previous tax years.
In general, a structured settlement provides a greater tax advantage than a lump sum.
As long as the original settlement is tax-free, payments sent as part of a structured settlement will remain tax-free over time.
You will not pay taxes on interest or investment growth since you do not own the investment.
With a lump sum settlement, on the other hand, if any of it is invested, interest or capital gains will become taxable in the future.
Factors to Consider When Choosing Settlement Structure
When it comes time to choose whether you would like a lump sum payment or a structured settlement, several factors should be taken into consideration.
An experienced personal injury lawyer in Nevada can review your needs and help you decide which option is right for you.
Relevant factors include:
- Your age and life expectancy
- Your current financial situation and debt obligations
- Ongoing medical care and treatment needs for severe injuries
- The financial security of your family and dependents
- Your investment experience and ability to manage finances
It is generally recommended to consult with financial advisors, tax professionals and a personal injury attorney before finalizing your settlement agreement.
Once you choose a payment arrangement, you cannot renegotiate or change your choice.
When Structured Settlements Make the Most Sense
A structured settlement may make more sense if you have suffered catastrophic injuries that require lifelong care, the victim is a child with decades of future expenses or if you wish to protect your settlement funds from creditors.
When Lump Sum Settlements Are Preferable
A lump sum may be the better option if you have immediate and urgent financial needs, existing debts or financial obligations, good investment opportunities or business ventures, or you are uncertain of what your life circumstances will be in the future.
Ed Bernstein’s Expertise in Settlement Negotiations
At Edward Bernstein & Associates, we can lend our knowledge and expertise in settlement negotiations to create the best settlement payout structure for you.
We can work with financial experts and settlement planners to protect your interests now and in the future.
Our lawyers can maximize the value of your settlement regardless of your payment structure by taking over negotiations with an insurer.
We can also craft a hybrid settlement option that is customized to your life and situation.
Our attorneys will set up provisions and a personalized payment schedule that fulfills your individual needs.
To learn more about planning a personal injury settlement, contact Ed Bernstein for a free settlement strategy consultation in Nevada.
We are committed to the success of our clients.