When you reach the end of your personal injury lawsuit, you have a few options regarding your settlement. One of those options is whether you want to receive a lump-sum payment or a regularly disbursed structured settlement.
For larger settlements, plaintiffs and defendants usually agree to a structured settlement. So you may be wondering, what are the pros and cons of a structured settlement or how does a structured settlement work? Here’s what you need to know.
How Does a Structured Settlement Work?
When you file a lawsuit, your attorney tries to negotiate compensation for your injuries with the defendant or their insurance company. Once you and the defendant reach an agreement on the amount the defendant must pay, you create a settlement.
During settlement negotiations, the defendant’s attorney might present a structured settlement option to you. Through this option, the defendant pays the total amount they owe over time through installments.
You continue to receive these payments until the defendant pays the full award. To do this, defendants usually purchase an annuity from an insurance company, who is then responsible for managing your payments.
Types of Cases That Allow Structured Settlements
In the United States, plaintiffs in personal injury cases have the option of accepting a structured settlement. This includes pharmaceutical injury and product liability cases. Keep in mind that not all lawsuits qualify for a structured settlement.
Pros and Cons of a Structured Settlement
While structured settlements are a good option for plaintiffs who require long-term health care, they may not be the right option for some cases. They are some risks associated with structured settlements to take into consideration. Here are some of the factors to consider before agreeing to a structured settlement.
Pros of Structured Settlements
There are several reasons why a structured settlement may be right for you. Here are some of the best features of a structured settlement option.
In the United States, the IRS gives structured settlements good treatment. Every disbursement of a structured settlement is tax-free.
Most structured settlements allow you to name a beneficiary in case you die before the insurance company pays out your entire settlement.
Unlike a lump sum, a structured settlement gives you steady income for many years after your lawsuit. This means that you won’t burn through the money as quickly. In addition, you are entitled to the full amount of your settlement regardless of economic changes.
Options to Sell
If you decide during your structured settlement that you want to use a portion of your settlement to pay off debt or make a large purchase, you can sell a portion of your structured settlement.
Cons of Structured Settlements
Sometimes, agreeing to a structured settlement comes with a few risks. Here are some of the reasons you may want to reconsider before agreeing to a structured settlement.
Taxes on Punitive Damages and Fees
While most of your settlement is tax-free, other portions including punitive damages and attorney fees are taxable.
Strict Payment Plan
Structured settlements lack flexibility for payment scheduling. Once you agree to a payment schedule, you cannot change it, even if your financial circumstances change.
Penalties and Fees
Selling or withdrawing a portion of your structured settlement involves several penalties and fees from both the IRS and the managing insurance company.
Loss of Interest
Since a structured settlement doesn’t accrue interest, you miss out on any interest you could have earned if you accepted a lump sum and placed it in an interest-bearing account.
A Note on Selling Your Structured Settlement
Since structured settlements don’t have any payment flexibility, some plaintiffs choose to sell their structured settlement in exchange for a lump-sum payment. People choose to sell their structured settlement for a variety of reasons, but these are by far the most common.
Pay Medical Bills
Since many people who end up getting structured settlements need long-term medical care, they may be in and out of the hospital. Instead of taking out personal loans for medical treatment, plaintiffs might decide to sell a portion of their structured settlement to pay for short-term medical bills.
After a lawsuit or personal injury claim, a plaintiff may have thousands of dollars in unresolved credit card debt, especially if they were out of work. Plaintiffs sometimes sell their structured settlement to resolve these debts.
Purchase a Home
One of the most common reasons plaintiffs sell their structured settlement is to make a down payment on a house. If the plaintiff already has a home, they may use the money for renovations.
Pay Student Loans
Since the average college student graduates with more than $30,000 in student loan debt, many people choose to get a lump sum for their structured settlement to get rid of that debt. You can also break into legal tech as a student and make money out of it. For younger plaintiffs, the money might be used to pay for college.
Still Waiting on a Settlement? Consider a Lawsuit Loan from Nova Legal Funding
If you are still waiting on your settlement and are struggling financially, consider applying for a lawsuit loan. At Nova Legal Funding, we offer pre-settlement lawsuit loans for plaintiffs who need cash now to pay for bills, medical treatment, and more.
We have some of the lowest rates in the industry and work with a variety of cases. Most importantly, our funding is risk-free, which means you don’t have to pay us back unless you win your case.