Advantages and Disadvantages of Structured Settlements

Sometimes, trying to understand all the ins and outs of structured settlements can be tough.  After all, you have one group of people who believe issues exist while others feel annuities are a huge benefit.  We wanted to take the opportunity to talk about the primary advantages and disadvantages of structured settlements so you have the information needed to make the right decision for your situation.

Sometimes, trying to understand all the ins and outs of structured settlements can be tough.  After all, you have one group of people who believe issues exist while others feel annuities are a huge benefit.  We wanted to take the opportunity to talk about the primary advantages and disadvantages of structured settlements so you have the information needed to make the right decision for your situation.

In talking about the advantages and disadvantages of structured settlements, remember that many others exist but we took some of the most talked about issues and provided some insight.  The good news is that while there are some disadvantages, without doubt structured settlements have far more positive aspects.

Advantages of Structured Settlements

•    Tax Free – Probably one of the first things people want to know about is how tax affects structured settlements.  Although taxes applied at one time, starting in 1982 that changed for local and federal taxes.  Now, the other option for a lawsuit or settlement is taking the lump sum payment, which is taxed.  However, if you were to invest money left over from that one payment after paying medical bills, the attorney, and living expenses, profit generated would not be taxed.
 
•    Security – Although you would have the option of accepting a lump sum payment or the structured settlement, the problem is that even people who are excellent at budgeting struggle with not blowing a lot of money that becomes available immediately.  For this reason, structured settlements offer a level of security.  Because you would receive the money awarded in scheduled payments, over spending is not an option.

•    Flexibility – You will also find that structured settlements offer flexibility.  In other words, you have a say in the payment period.  For instance, if you were awarded $600,000 from an injury sustained at the hands of a company or person who acted with negligence or malice you could have that money split up into payments over the course of five, ten, or twenty years.  However, another option that most people choose is to have payments spread out over your life space.

•    Money Savings – Because a payout such as this is often settled out of court rather than being an award associated with a lawsuit by a jury, significant expense is spared.  With this, you would not have years of accumulated attorney fees so in the long run, you actually save money by accepting a structured settlement over a lawsuit.

Disadvantages of Structured Settlements

•    Once you lock into a structured settlement, you cannot go back and change your mind.  However, if you took the payout payments but then find yourself faced with a situation whereby you need a lot of money quickly the value of the settlement could be sold.  While this is an option,  the challenge is that the companies that purchase structured settlements charge hefty fees so this should always be considered as a last resort.

•    Interest – Unlike other forms of income or investments, interest is not paid on structured settlements.  Instead, the amount of payments received have interest automatically built in but when you consider that no tax is charged and that interest could be earned on leftover money after paying mandated expenses, you can see this is both an advantage and disadvantage.

•    Loan Collateral – When taking out a lump sum settlement the money could be used as collateral for securing a loan but with structured settlements, payments cannot.  In fact, if you were to find a lender that would accept your structured settlement payments as collateral, you could actually be putting the entire financial agreement at serious risk.  On a side note, if you needed additional income to qualify for a loan, the payments of your structured settlement could be declared as income.