In many civil cases, mainly personal injury and accident lawsuits never make it to trial. This is because the parties reach an agreement to settle early in the litigation process. Normally, a settlement requires the plaintiff (who is the person bringing the lawsuit) to withdraw from further legal action in exchange for a financial settlement from the defendant or in most cases the defendant’s insurance company. Settlements are usually paid as a lump-sum meaning all at once or as structured payments for a period of time. So before agreeing to any settlement, discuss all options with your attorney. Below are some of the pros and cons of structured settlements to consider.
PROS
Structured settlements may provide the plaintiff with a significant tax benefit. Lump-sum settlements are sometimes considered income and must be claimed on their taxes. Payments from an annuity are tax-free, but only if the plaintiff is not in control of the funds.
Typically, a plaintiffs who receive a lump-sum settlement will often spend it all within five years. This will lead many to become dependent on the government for their needs. However, with a structured settlement, the funds are allotted throughout the plaintiff’s disability.
A professional should manage the Annuity. Proper financial planning will insure that plaintiffs have enough finances for future expenses.
Tailoring annuities is essential to cover a plaintiff’s immediate needs and all other future needs.
Most states have annuity protection backed by state insurance laws that guarantee all obligations will be covered even if the insurer goes bankrupt.
A lump-sum payment and a structured settlement may be combined to cover immediate expenses, such as medical bills, rehabilitation costs, repayment of debts, and more.
Funds of a structured settlement can be allocated to cover unanticipated advances in medicine so if a miracle cure is developed, the plaintiff can try it out.
A structured settlement can sometime close the gap when the plaintiff and defendant cannot reach an agreement.
CONS
A plaintiff who has too much control of the structured settlement proceeds, risk the IRS looking into the matter and decide to withdraw the tax breaks.
Plaintiffs may worry that, no matter how well the settlement protects against a negative economy, the annuity payments may be too small for conditions such as a recession or inflation and other unexpected changes in the economy.
At times, an annuity is placed with brokers who lack the sufficient protection for insolvency which means the financial obligations outweigh the assets.
Insurance companies seldom disclose the amount they have to pay to buy an annuity to cover the amount of the settlement. This is because a structured settlement often costs insurance companies far less than it takes to make a lump-sum settlement. Without this information, the plaintiff’s attorney might not be able to complete a thorough assessment of the benefits and drawbacks of the settlement offered.
In many cases, a settlement is quicker, less expensive, and a far less stressful alternative to a trial. You can discuss your case with an experienced personal injury attorney to decide the best option for your case.