Your injury case settled for $500,000. Now the insurance company is offering you a choice between receiving the full amount immediately or accepting a structured settlement paying you over 20 years. The decision feels overwhelming, and you’re not sure which option better serves your long-term interests.
Our friends at Johnston | Martineau PLLP discuss how this choice represents one of the most important financial decisions injury victims make. As a truck accident lawyer will tell you, the right answer depends on your specific circumstances, financial discipline, tax situation, and future needs.
What Structured Settlements Actually Are
A structured settlement replaces a lump sum payment with a series of periodic payments over time. These payments are funded through annuities purchased from life insurance companies that guarantee specific amounts on specific dates for the agreed period.
The payment schedule is customized to your needs. You might receive monthly payments for life, annual payments for 20 years, or a combination including immediate partial lump sum plus future periodic payments.
Once established, structured settlements are generally irrevocable. You can’t change the payment schedule or accelerate future payments if your circumstances change. This permanence creates both security and inflexibility.
The Tax Advantages Of Structured Settlements
Structured settlements offer significant tax benefits under federal law. The periodic payments you receive, including the growth component, are completely tax-free for physical injury settlements. This exemption applies to the original settlement amount and all interest or growth the annuity generates.
A lump sum settlement is also tax-free initially, but any investment income you earn by investing the money becomes taxable. If you receive $500,000 and invest it, the dividends, interest, and capital gains create annual tax obligations.
Over decades, the tax-free growth in structured settlements can be worth hundreds of thousands of dollars compared to taxable investment returns on lump sum payments.
Guaranteed Income And Protection
Structured settlements provide guaranteed payments regardless of market conditions, economic downturns, or investment mistakes. The annuity company must make scheduled payments even if markets crash or inflation soars.
This guarantee protects you from poor investment decisions, market volatility, and your own potential financial mismanagement. Many injury victims lack investment experience and risk losing lump sum settlements through bad investments or overspending.
State guarantee associations provide additional protection if the annuity company fails, typically covering payments up to $250,000 or more depending on the state.
Inflation And Purchasing Power Concerns
The primary drawback of structured settlements is inflation risk. Fixed payments that seem adequate today will buy less in 20 years. A $3,000 monthly payment provides comfortable living now but might be inadequate decades from now.
Some structured settlements include cost of living adjustments to address inflation, but these adjustments typically reduce the initial payment amount. You receive less now in exchange for payments that increase over time.
Lump sum recipients can invest in assets that potentially outpace inflation like stocks or real estate, though this requires accepting market risk and making sound investment decisions.
Immediate Financial Needs
Lump sum payments address immediate financial needs better than structured settlements. If you need to pay off a mortgage, purchase an accessible vehicle, or fund necessary home modifications, immediate access to the full settlement amount might be necessary.
Structured settlements can include upfront lump sum portions to address immediate needs while providing long-term periodic payments for living expenses. This hybrid approach combines the benefits of both payment structures.
Creditor Protection Varies By State
Structured settlement payments receive some creditor protection in many states. Future payments can’t be easily seized by creditors the way a bank account holding a lump sum can be.
However, this protection varies significantly by jurisdiction. Some states provide strong protections while others offer minimal safeguards. Additionally, certain creditors including the IRS can reach structured settlement payments despite general creditor protection laws.
Medicaid And Government Benefit Considerations
For injury victims who might need government benefits, structured settlements can be designed to preserve eligibility. Large lump sum payments typically disqualify recipients from Medicaid, SSI, and other means-tested programs.
Properly structured periodic payments can potentially maintain benefit eligibility depending on payment amounts and program rules. Special needs trusts combined with structured settlements provide even stronger benefit preservation.
This consideration particularly matters for catastrophically injured people who will need long-term care and government assistance.
The Secondary Market Problem
Despite structured settlements being designed as irrevocable, a secondary market exists where companies purchase future payment rights for lump sums. These “structured settlement factoring” companies advertise heavily to convince payment recipients to sell their rights.
The amounts offered are typically 40% to 60% of the actual value of future payments. Desperate sellers accept these terrible deals, destroying the financial security the settlement was meant to provide.
Court approval is required for these sales in most states, but courts often approve them when sellers claim financial need. The existence of this market undermines structured settlement benefits for people lacking financial discipline.
Life Expectancy Considerations
Structured settlements that include lifetime payments work well for people with normal life expectancies. You receive income for as long as you live, protecting against outliving your money.
However, people with shortened life expectancies due to injuries might prefer lump sums. If your injury reduces your life expectancy significantly, receiving smaller amounts over many years you might not live to see makes little sense.
Some structured settlements include guaranteed payment periods or death benefits to address this concern, ensuring your estate receives value even if you die early.
Investment Opportunity Cost
Financially sophisticated individuals might prefer lump sums to pursue investment returns exceeding what structured settlement annuities provide. Stock market historical returns average around 10% annually, potentially outperforming structured settlement growth rates.
However, this requires investment knowledge, risk tolerance, and discipline to avoid spending principal. Most injury victims aren’t professional investors and would likely achieve better outcomes with guaranteed structured payments.
Flexibility And Life Changes
Life circumstances change in unpredictable ways. You might face unexpected medical expenses, business opportunities, or family emergencies requiring large sums of money.
Lump sum payments provide flexibility to address these situations. Structured settlements lock you into a fixed schedule that might not match your evolving needs.
This flexibility comes with responsibility. Many people who thought they would manage lump sums wisely end up spending everything within a few years and having nothing left.
Professional Financial Planning
Regardless of which option you choose, professional financial planning is essential. Lump sum recipients should work with financial advisors to invest prudently and create sustainable income streams.
Structured settlement recipients benefit from planning around their payment schedule, budgeting for periods between payments, and investing any lump sum portions wisely.
Combining Both Approaches
Many settlements use hybrid structures providing immediate lump sums for specific needs plus periodic payments for ongoing living expenses. This combination addresses immediate financial requirements while creating long-term income security.
For example, you might receive $100,000 immediately to pay medical bills and modify your home, plus $2,500 monthly for life to cover living expenses. This structure provides both flexibility and security.
When Structured Settlements Make Most Sense
Structured settlements particularly benefit people who:
- Lack investment experience or financial sophistication
- Have demonstrated poor money management in the past
- Face long-term disability requiring lifetime income
- Need to preserve government benefit eligibility
- Want guaranteed income they can’t outlive
- Prefer tax-free growth over market-based returns
When Lump Sums Make Most Sense
Lump sum payments work better for people who:
- Have immediate large expenses requiring full settlement access
- Possess financial sophistication and investment discipline
- Face shortened life expectancies from their injuries
- Want maximum flexibility and control over their money
- Can accept investment risk for potentially higher returns
- Have specific investment opportunities they want to pursue
If you’re facing the decision between a structured settlement and lump sum payment or need guidance about which payment option better serves your financial situation, reach out to discuss the tax implications, protection features, and long-term consequences of each choice so you can make an informed decision that provides financial security for your future.
