When a person is awarded a payout in a personal injury claim or similar lawsuit, they often have the choice of how they wish to receive their money. They could choose to receive the entire amount upfront, or they could receive the payments over time. There are advantages and disadvantages to each type of payment.
The Lump Sum Advantages
A lump sum payment means that the entire amount of the settlement is paid all at once. While this may seem like the preferable option at first, there are a few disadvantages. The key advantage to a lump sum is that all of the money is accessible to you to do with as you wish. This gives you greater flexibility in case unexpected expenses or opportunities arise.
One of the biggest problems with a lump sum payment may be your personal ability to manage such an amount of money. Many settlements exceed the actual costs of an accident if non-economic or punitive damages have been applied. If you don’t have a clear plan for managing or investing the money, then you probably aren’t going to make the best use of it. It is also worthy to keep in mind that when a structured settlement company pays an annuity to you, it collects interest, so you will end with more than the original settlement by the time the payouts are complete. Unless you have an investment with similar or greater returns prepared, you may actually lose money by taking it as lump sum.
Most people want to believe that if they are handed hundreds of thousands or millions of dollars that they will be responsible with the money and make it last. Experience tells us that this is not typically the case. It is human nature to spend money on luxuries when that money is available. Very large settlements may allow a person to live comfortably for a lifetime, but only if the money isn’t squandered. The best way to control your spending may be to make sure you don’t have access to all the money to begin with.
The Structured Settlement Advantages
A structured settlement breaks the payout of the settlement into parts. There is a huge amount of flexibility with this payout method so that a person who plans correctly can make the system work for them. Payouts do not have to be the same for the entire term. It is common to take out a large first payment to cover immediate expenses and boost depleted savings accounts and then prolong payment of the remainder. Payments can also be set to increase or decrease over time. Responsibility for payment is often handed to a third party as an annuity where the unpaid amount will begin to collect interest and act like an investment.
While structured settlements give great flexibility at the start, they are not flexible at all once set. The payment plan and term cannot be changed in any way once created. This can be a problem if unexpected expenses occur and you need access to the money. This is one reason that certain businesses have arisen to take over structured settlements and give you the lump sum upfront. Taking a loss by using these services would be the only way to get the money.
Possibility of Loss
While remote, there is a possibility that the unpaid amounts of a settlement will be lost if the entity responsible for payment goes bankrupt. There is a greater risk of this if the payment remains with the business that was sued. Most institutions that handle annuities, by contrast, are considered financially secure.
The choice to take a lump sum or a structured settlement is not as easy as it first appears. It is important to carefully consider your current and future financial position when making the choice. The lump sum gives greater flexibility but overall less money or reliability, while the structured settlement may give you more money overall and last longer. Your attorney or financial advisor may also be able to help you with this decision. You only get one chance, so it’s important to choose wisely.