Hundreds of thousands of Americans depend on structured settlement payments to meet their basic needs. Each year about 30,000 more Americans gain the peace of mind that comes with a structured settlement award.
So, what’s a structured settlement, and how can it help you? Use this quick guide to understand how structured settlements work.
What’s a Structured Settlement?
When a plaintiff wins or agrees to settle a lawsuit, they receive payment for their injuries. There are two general options, a lump sum or a structured settlement.
The lump-sum pays the entire amount in one large payment. Structured settlements are a stream of smaller payments that could last months or years.
How Do They Work?
The defendant of your case will put money into an annuity. The annuity is a financial product that’s managed throughout the life of the structured settlement.
The money that you receive through your settlement payments is almost always tax-free when you receive it. Once the money is in your possession, you’re liable for the taxes and dividends from the lump sum.
You’ll need to decide if you want to start receiving money right away or at a later point in time. If you have mounting bills then opting for payments to begin immediately can help with this.
You could choose to postpone your payments until after you retire. If you choose this option, the award money will grow and earn interest in the annuity.
There are also options as to how long the payments are made. They could happen for a set number of years or for the rest of your life.
You can also choose between having a set amount paid each time or payments that go up or down in value over time.
Setting up a structured settlement can help you manage your money. This is especially helpful if you’ll need long term care.
Unlike other investment options, you don’t have to worry about market fluctuations affecting your payments.
Depending on how your settlement is set up, your heirs may be able to continue to receive payments tax-free.
You need to be sure that you’re happy with the agreement you and the defendant come to. There’s minimal opportunity to alter the agreement later. You can’t go back later to renegotiate if your financial situation changes.
You can’t choose to have your annuity invested in other areas that offer higher rates of return. There are also surrender fees and IRS penalties if you decide to take out payments early.
You also need to check what the establishment and management fees are. You could lose a large amount of your settlement if you aren’t careful.
Know Your Financial Options
If you’re currently involved in a legal complaint, you no longer have to wonder, what’s a structured settlement? These smaller long term payments can ensure that you have the financial means to care for you and your family despite the injury you suffered.
For more financial advice, be sure to check out our Money Tips section.