Many lawsuits are settled out of court since a trial takes much money and time. In this situation, the two parties agree that the plaintiff will halt further legal action against the defendant. In return, the latter pays the former for the damages caused. The reimbursement may be received up front (in a lump sum) or through yearly payments (a structured settlement).
Each option has its own advantages and disadvantages. To learn which one is for you, start with the major pros and cons of a structured settlement:
Pro: They’re Tax Efficient
The two payout methods are both non-taxable. If a plaintiff’s vehicle was lost in an accident, they could be compensated through a lump sum without paying tax. Similarly, each distributed amount in a structured settlement won’t incur tax if the party chooses this option.
But, with annuities, you have lesser financial obligations. The investment made with a lump sum comes with a taxable interest that needs to be paid every year. On the other hand, your money will still grow in a structured settlement, and there’s no fee charged for each amount.
Con: You Can’t Change the Terms Once Set
After you’ve opted for a structured settlement, the terms and conditions can’t be negotiated again. You’re “locked in” to receive the annuities regardless of whether you enjoy the amount of interest you’re getting or not.
If you change your mind and wish to fund a personal endeavor, you need to sell your annuities for cash. A factoring company, like Rightway Funding, reviews clients’ financial backgrounds and purchases their structured settlements. The amount you’ll be getting may not be as large as the total reimbursement, but you receive your yearly payments in an instant.
Pro: You Have a Steady Source of Income
Instant cash may sound alluring, but some people have difficulty with controlling their urge to spend. With annuities, you only receive the monetary compensation in small amounts at a time. As a result, you don’t only enjoy steady, additional income for the next years, but also evade impulse buying that usually happens with a lump sum.
Additionally, state insurance laws protect annuities. In the rare case that the insurer providing you the structured settlement goes bankrupt, you’ll still be paid. So, your financial security is guaranteed.
Con: The Rest of the Funds Can’t Be Accessed When Needed
While you’re certain to receive portions of your reimbursement regularly, you’re not allowed to pull out the rest of the funds when you need them to cover expenses for an accident or a health problem. Withdrawing them will only incur penalties. For this reason, other people opt to have a large amount of money in their banks ready for these kinds of situations.
The best payout option is based on your current situation, needs, and goals. Consult your lawyer and your financial advisor to help you decide between a lump sum or annuity payments.