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Pros and Cons of Accepting a Structured Settlement from a Lawsuit

Updated on January 3, 2011

Would You Take a Structured Settlement or a Lump Sum Payment?

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If you are ever involved in a lawsuit where you settle for a sum of money then you may be given the option of accepting a structured settlement. This means that you agree not to get your payment in one lump sum at the time of the settlement. Instead, you agree to receive payments over time until the sum total has been received. There are pros and cons to accepting a structured settlement especially in terms of the financial aspect of the situation.

Benefits of Accepting Structured Settlements

There are many terrific reasons to accept structured settlements including reasons that benefit you financially. Some of the benefits of accepting a structured settlement may include:

o   You pay less in taxes and may even pay nothing at all. Expert Law explains that accepting a structured settlement is a smart decision in terms of the taxes that you’ll pay on the money that you receive. If you receive small amounts of money over time then you will pay a smaller amount of taxes and may not even be obligated to pay any taxes on the money at all. In contrast, if you agree to a lump sum payment then a huge chunk of that money might disappear quickly, going straight to Uncle Sam.

o   You are less likely to use the money up too quickly. People who haven’t gotten financially literate and don’t know how to budget their money may find that a lump sum payment is more trouble than good. They get a big chunk of money and blow right through it, leaving nothing for later. This is especially bad in cases where the settlement is received due to an injury or accident that either requires medical care or prevents the injured party from working. That money may really be needed down the line. If you accept a structured settlement, you’ll receive regular ongoing payments and prevent the problem of blowing everything all at once.

o   You can sell your structured settlement later. You may have the option in the future of selling your structured settlement for a lump sum payment. You can lose a little bit of money in the long run by doing this. However, it’s nice to have the option as a backup plan in case structured settlements aren’t working for you. In contrast, there is no backup plan in place if you accept a lump sum payment and it doesn’t work out. That money is just gone at that point and there’s nothing you can do about it.

Drawbacks of Accepting Structured Settlements

Structured settlements do sound like a great option don’t they? However, they have their drawbacks, too, and you need to know about those before you make a decision about whether or not accept a structured settlement in lieu of a lump sum payment. Some of those drawbacks include:

o   It’s tougher to pay off debt. If you have a lot of debt then it can be nice to accept a lump sum payment and pay that debt off immediately. Although you can use structured settlements to make payments on the debt, you’ll be paying the interest on the debt for a longer period of time and losing money over time as a result.

o   Structured settlements don’t help you to make large purchases. In the same way that you can’t pay off debt all at once without a lump sum payment, you won’t be able to make a large purchase. Let’s say that your injury has caused you to want to relocate to a new home closer to your adult children. You could cover those costs with the money from a lump sum payment but may not be able to do so with just a structured settlement.

o   Your disability / medical assistance may be affected. People who receive financial assistance from the government may find that their funds are affected when they receive regular ongoing settlement money. This is a common issue since structured settlements are often issued as a result of an injury or accident that causes a disability or requires ongoing medical care. It’s important for people who are receiving such funds to speak with their social worker to find out how their funds will be affected by structured settlements and/ or lump sum payments.

o   You may lose out on investment money. People who are smart with investing their money may find that they benefit more financially from taking a lump sum payment and investing it to earn a high percentage of interest over time. It’s tougher to invest the small amounts of money received periodically from a structured settlement plan.

o   It can take a long time to receive your total payment. If you are very ill or elderly and don’t expect to live for a long time then you may find it ridiculous to accept a twenty year payment plan when you could get a lump sum payment right now that may last you for the rest of your life.

So Should You Accept a Structured Settlement?

Because there are pros and cons to structured settlements, it’s important to think very carefully before deciding to accept one if the option is offered to you. Consider the benefits and drawbacks. Before reaching a final decision on the issue, it really is wise to speak to someone with professional experience in accounting, taxes and personal finance. They can assist you in looking at your expenses, budget, spending habits and tax concerns so that you can make the decision that is smartest for your particular situation. There simply is no right or wrong answer when it comes to structured settlements; there is only what may be right for you.

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  • SecureHorizon profile image

    Madeleine Coe 

    3 years ago from Rockville, MD

    This was a great examination of the benefits of a structured settlement as compensation vs. the benefits of a lump sum. However, it is important to note that a structured settlement may work for the plaintiff from a personal injury suit when it is set up, but they may find that they require a lump sum as their needs change over time. Factoring companies exist to help payees exchange some or all of their payments for a lump sum, and it's good to know they can really have both when weighing the two options.

  • Hello, hello, profile image

    Hello, hello, 

    7 years ago from London, UK

    Splendidly written hub with good information on both sides of the coin.

  • Simone Smith profile image

    Simone Haruko Smith 

    7 years ago from San Francisco

    Personal finances are hard enough - combine them with legal issues and most of us are SOL! I appreciate your taking the time to explain the pros and cons of structured settlements. Should I ever find myself in the unfortunate position of being presented with one, I shall certainly return to this guide!

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