You’ve been hit by a car. And the worst thing you can go through has passed.
You’re safe.
But what happens next?
Filing personal injury lawsuits can be confusing. It’s something that most of us aren’t used to. We don’t get into accidents daily. But when it comes to settling, what should you go for? Should it be a structured settlement or a lump sum payout?
A structured settlement and lump sum payouts are the two types of ways you can get paid after winning a personal injury case. A structured settlement is a type of payment where you are guaranteed fractions of the payment over a fixed amount of time. A lump sum payout will allow you to receive the full payment owed to you in one big payment.
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To visualize this, pretend that you are owed $200,000. If you go for a structured settlement, you would get fractions of $200,000 over a period of time. This would depend on your arrangement. You could be able to get $10,000 a month over 20 months. That’s just an example. If you go for a lump sum payout, the defendant would have to pay you the whole $200,000 in one payment.
So which type of payment should you arrange for? Structured settlement or lump sum payout?
Let’s list the pros and cons of each type.
Structured Settlement
As said in the introduction, a structured settlement is a type of payout that is distributed over a certain amount of time. This is paid out by the defendant or their insurance company. The plaintiff will be able to negotiate with the defendant over the payment details. This is why if you choose a structured settlement, you must be strategic with it. Here are the pros and cons of structured settlements to help you choose.
Pros of Structured Settlement
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You can manage your money
Having a structured settlement and getting fractions of the payment guarantees that you won’t spend the money too fast. You can treat it like a monthly income of sorts (if you choose to receive the payment monthly.
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Tax benefits
Structured settlement payments are free from federal and state income taxes. There is also no tax on dividends, capital gains, and interest.
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Assured Income
A structured settlement payout will ensure that you have a regular cash inflow. You can also treat this like a regular income.
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Cons of Structured Settlement
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You can’t pay any outstanding debt immediately
A structured settlement comes in fractional payments. These payments may not be enough to pay off any large debt that you may possibly have.
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You cannot change your terms
Once you have negotiated and have come to an agreement on the terms with the defendant, you cannot change them. Your payments from a structured settlement cannot be treated as an emergency fund for this reason.
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You can’t make big investments
You will get your money in small portions. Because of this, you won’t be able to make any big investments with this money.
If the structured settlement type of payment doesn’t seem right for you, then maybe you should consider a lump sum payout.
Lump Sum Payout
A lump sum payout is a payment scheme where you get your settlement in one full payment. Once this payment is cashed out or deposited, then your settlement would be over. This is also usually handled by the defendant or the defendant’s insurance company.
Now let’s go over the pros and cons of a lump sum payout.
Pros of a Lump Sum Payment
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You get all your money at once
This is the main essence of getting a lump sum payment. When it is over, there will be nothing more for you to deal with. You would gain closure over the whole case as there is nothing more for you to think about.
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You can use the money as an investment
Getting a large sum of money all at once gives you possibilities. A common instance is that plaintiffs invest this money so that there can be growth. This would be a good strategy if you have smart investments in mind.
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You can pay for outstanding debt
Because you have a large amount of liquidity due to getting a lump sum payout, you can also pay outstanding debt. There would be even less for you to worry about after doing so.
However, there are also cons to getting your money all at once.
Cons of a Lump Sum Payment
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You can lose your money easily
Having a large amount of money on hand does not mean that you will have it forever. You may struggle with poor budgeting or a bad investment. This will end up with you having none of the money that you were supposed to benefit from.
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You can be taxed
If you invest your lump sum payment, all the earnings that you get from this will be taxed. If you choose a structured settlement, you will not have to worry about this because you will be tax-free.
Some things to consider
It will be up to you what type of payment scheme you want to take. Here are just some of the things that you need to consider when doing so:
Expenses
If you have large expenses that you know are coming up, such as your mortgage or tuition payments, a lump sum payment would be the best arrangement for you. This would be a great help in paying these kinds of bills. However, if you only have regular monthly expenses to look forward to, then a structured settlement would be good for you.
Spending Habits
If you are not used to handling large amounts of money, or you worry that you might spend it wrongly, a structured settlement would be for you. Having a structured settlement will just ensure that you have a steady flow of money and you won’t have to worry about running out of money immediately.
Amount of Settlement
If your settlement amounts to less than $150,000, it would be best to get a lump sum payout. You won’t really feel the benefits of putting a small amount of money in a structured settlement, and it won’t really feel like an income if you do so.
Conclusion
Regardless of what type of payment scheme you choose for your settlement, it is ultimately up to you if you put it to good use or not. Make sure to practice good budgeting habits and wise spending whenever you have money on hand. We wish you good luck with your settlement!