The hard part is over. You survived a devastating accident and were able to win compensation from the driver who caused the accident. You're fighting to get better and are grateful to have the money from the settlement to help in your continued recovery.
At this point, you may be faced with a question about how you want to receive the settlement. Do you want to accept the total amount now as a lump sum payment, or negotiate a structured settlement so that you're paid over a period of time? We explain your options here.
How Does a Structured Settlement Work?
In a structured settlement, the at-fault party pays out the total amount that's been determined—usually through an insurance company—but instead of compensation paid directly to the victim, it goes into an annuity. The annuity contract specifies how victim receives payments.
You may choose to receive payments from a structured settlement in any of the following ways:
- The entire amount in equal payments over a period of time.
- The entire amount in unequal payments over a period of time. For example, the payments may increase or decrease in amount over time.
- Payments until the recipient dies.
- The entire amount in payments until the recipient’s death, at which point a beneficiary becomes the new recipient of payments until the term of the agreement has ended.
- A lump sum payment after the annuity is awarded, or at a later date, such as with a deferred annuity.
- A lump sum initially for a part of the total amount, followed by recurring payments until the end of term.
- Delayed payments that may begin at a certain date or age, such as when the recipient reaches adulthood or enters retirement.
An attorney or financial advisor can help you choose the option that works best for you. In general, the major advantage of a structured settlement is that you have a better future guarantee of income than you would if you received all the money at once and then spent it quickly.
Interestingly, the whole concept of a structured settlement arose from the Thalidomide crisis of the 1970s to ensure that the babies who were the true victims of the drug would be guaranteed money for their entire lives. Today, structured settlements are often used to benefit children and to protect settlements from predatory family members. However, there may be service fees involved, and there could be penalties if you find a need to withdraw funds early.
How Lump Sum Payments Work
Most personal injury, wrongful death, and workers’ comp settlements are made as a lump sum payment. This means that the at-fault party pays the entire award amount to the victim immediately.
Some advantages of lump sum payments include immediate access to the full amount to pay all medical bills and other damages; and the ability to invest the money in ways that allow the money to grow over the years. However, lump sum payments are often subject to taxation. A lump sum payment also exposes the recipient to the temptation to spend extravagantly, rather than saving for tuition, retirement, or future medical expenses.
How to Choose Between the Two Options
If you're given the choice between a lump sum payment and a structured settlement, you'll have to examine your needs and be honest about spending habits. Some questions to consider include the following:
- Do you have upcoming large expenses such as mortgage or tuition payments? How far away are they?
- How risky are your spending habits?
- Will family members expect financial assistance from you?
- Are you financially skilled enough to manage and invest a lump sum payment?
- Will you be able to budget and spend the full award responsibly?
- Will a lump sum payment affect your tax obligations?
- Will your injuries, such as a spinal cord injury or paralysis, require lifelong care?
- Do you have young children you want to provide for in the future?
Discussing these questions with your attorney or financial advisor will help you make the right decision regarding your personal injury settlement. The car accident attorneys at Kansas City Accident Injury Attorneys will be by your side when you first make your claim and to help you make a decision about your settlement payout, bringing their years of experience to your case.