If you sustained injuries in a car, trucking or bicycling accident and filed a personal injury claim, there is a good chance your claim will never make it to court. This is because most civil suits settle outside of court and in negotiations.
If your claim settles, the defendants will make one of two types of settlement offers: a lump-sum payment or structured payments. If you agree to a lump-sum offer, you will get all your money at once. If you opt for the structured settlement, however, you will receive regular payments over a predetermined period of time. FindLaw explains what a structured settlement is and when it is and is not a good idea.
The basics of a structured settlement
A structured settlement arrangement is one in which you receive monthly payments over the course of several years or even for the duration of your life. Your attorney will typically argue for a structured settlement if you sustained catastrophic injuries and will require extensive medical care for the remainder of your life. With this type of settlement, the defendant’s insurer pays you an annual annuity, which will serve as a continual stream of income for you. Because annuity payments must cover the cost of extensive and possibly progressive medical care, annuity contracts are typically complex.
The advantages of a structured settlement
There are several advantages associated with structured settlements. For one, the U.S. Tax Code declares all personal injury settlements “tax-free” — even structured settlements. Two, structured settlements provide you with a continual stream of income, which may prove beneficial as you remain unable to work. Three, most state insurance laws protect the annuities of injured parties. What this means is that if the defendant’s insurer becomes unable to meet its obligation for any reason, the state’s guaranty association will step in.
Four, your attorney and the defendant’s insurance can tailor your arrangement to suit your specific needs and anticipated future demands. It is even possible for your agreement to include funds for advances in medicine that may result in a miracle cure. Finally, you can combine a structured settlement agreement with a partial lump payment to cover both current expenses and future ones.
The pitfalls of structured settlements
Though they come with several benefits, structured settlements do have their drawbacks. While the government will not tax compensatory damages, it may tax punitive damages, or damages the court awards to punish the defendant. It may also tax attorney’s fees and purely emotional damages. Your settlement payments may also accrue interest over time.
You may also fear that a poor economic climate may eventually render your annuity payments too small to cover the costs of living. Finally, while insurers do not generally reveal how much they pay out in annuities, the general consensus is that structured settlements cost them far less than lump-sum payments.