Settlements can be an absolute dream come true, but making the right decision on how to receive it is a huge challenge. Should you take a lump sum payout or opt for a structured settlement instead? Let’s look at both options and see which one best suits your needs and financial goals. Both have their pros and cons, and it’s important to understand them in order to make an informed choice about how to receive your hard-fought and well-deserved settlement package!
What are Structured Settlements?
Structured settlements are financial agreement designed to bring long-term financial security to an affected party by allocating periodic payments for a set period of time. The sum received is tax free, as it does not count towards gross income.
A key point to remember when agreeing on the terms is that the two parties cannot edit them once agreed upon. Should any short-term monetary difficulties arise, those involved may opt for pre-settlement funding, which permits a plaintiff to receive advance payments prior to their claim’s resolution in court.
Structured settlements come in many forms: annuities supplied via settlement funding companies, US treasury bonds and self-funding by defendants.
What is a Lump Sum Settlement?
It is the simplest way to receive reparations for damages as all the amount is received at once. It is usually advised to go for this type of settlement if the amount is not so large. Another situation where lump settlement is used is when there are no long-term injuries to the victim.
This would mean they do not need to be paying continuous medical costs. It is important to note that the original lump sum settlement is tax-free but any investment gains made from that cash will be taxed.
Lump sum payments have a lower value when used to pay for an asset because the funds are paid upfront. They are also associated with pension plans and 401k accounts.
Structured Settlement vs Lump Sum?
There are many things to consider when differentiating between lump sum and structured settlement plans. Both structured settlement and lump sum have some very good advantages as well as some disadvantages. Those pros and cons are discussed in the paragraphs below.
1.Taxes
Lump sum payouts are tax-free but any returns from investment or growth is taxed. This is something to consider for those who plan to take a one-time payment. This enables them to invest in large amounts. Alternatively, structured settlements are also tax-free, and so are the gains made from structured settlements. This is good news for those who invest in smaller amounts but for a longer period of time.
2. Medical Support
A plaintiff has two options to choose from depending on his/her medical condition. An injury sustained at work requires a structured settlement. This provides the victim with the opportunity to pay the recurring medical bills till they are back to full health. If a victim has already incurred medical bills before the settlement, it would be better to use a lump sum option to pay all the medical bills at once. If the plaintiff still insists on structured payments, they can seek settlement loans from legal financing companies.
3. Flexibility
Structured settlements enable plaintiffs to match future payments on future needs. This benefit does not apply to lump sum. This is because plaintiffs can only pay with the full amount they have received. Another form of flexibility offered by structured settlement is the ability to design cashflow needs based on living and medical expenses. It can also be designed to accommodate living expense increase. Lump sum do not afford this luxury as the payment is received once so it cannot adapt to future price increase.
4. Financial Risk
A lump sum can come with an abundance of financial hazards, as one could rapidly run through their funds without a proper support system in place. However, this is not the case with a structured settlement funding plan.
Plaintiffs are shielded from market unpredictability and have limited exposure to potentially unreliable counsel and excessive spending. Furthermore, legal funding for structured settlements is considered a strong and dependable retirement choice for seniors due to the guarantee of steady income even in their later years.
Things to Consider When Choosing a Settlement Plan
Now that we know the differences between lump sum payout and structured settlement, we can now look at what to consider when deciding on what settlement plan to go for.
1. Urgency
Due to the nature of lump sum settlement, it enables the plaintiff to be able to spend on matters of urgency as the amount is received all at once. The plaintiff will be able to spend the money however they like due to it being paid once. On the other hand, structured settlement funding companies do not offer the option to receive payment because they pay in annuities. With a lump sum payment, you can make bigger investments. Those investments can bring in more returns but the downside is if those investments don’t turn out well, you are left to hang dry because no money is coming in.
2. Spending Habit
If you believe your spending habit is very impulsive, it is advisable to go for a structured settlement plan because you would be protected from your bad spending habits. If you are very prudent with money and can invest smartly, you can use the lump sum payout method.
Final Thoughts on Settlement Plans
When deciding how to receive a settlement, it is best to understand the differences between structured settlements and lump sum payouts. Structured settlements provide ongoing income over time, while lump sum payments offer full access to the funds but at a reduced amount overall.
Considering the pros and cons of both options is important, along with weighing up one’s financial needs, intentions, and preferences in the present and future. With a deep exploration of each option’s risks, rewards, and drawbacks, individuals can choose the payment method that works best for their unique circumstances.