How Structured Settlements Work & When They’re Better than Lump-sum Payouts

A successful personal injury claim may result in compensation paid either as a structured settlement or a lump-sum payout. Each option has its pros and cons, but one may be a better choice for you, depending on your individual circumstances.

Learning more about structured settlements vs. lump-sum payouts can help you evaluate your options. Speaking with a Pennsylvania personal injury lawyer can also help you pursue compensation appropriate to your case.

What are structured settlements, and how do they work?

A structured settlement is a settlement that you receive across several individual payments. Each of these payments encompasses a portion of the settlement and, in turn, the money you obtained from a successful lawsuit.

For example, if you get a settlement of $150,000, you could receive this settlement in $50,000 portions. This means you might receive $50,000 every three months until nine months have passed, and you have received the full $150,000 settlement.

The structure of a structured settlement can vary depending on the case. Payments may be made over a period of months, years, or even decades, and in some situations may continue through retirement or for the remainder of a person’s life.

What are lump-sum payouts, and how do they work?

A lump-sum payout is when you receive every dollar of your settlement in a single payment. By getting a lump-sum payout, you won’t have to wait for further payments in order to receive the entirety of your settlement.

For example, if you get a settlement of $75,000, you might get this settlement as a lump-sum payout. This means you can get this $75,000 all at once, allowing you to use the funds right away.

Structured settlement vs. lump-sum payouts: What are the advantages and disadvantages of each?

The advantages of structured settlements

The main advantages of structured settlements include:

• Managing settlement funds may be easier, because payments are received over time rather than all at once. If you get a settlement of $75,000 and receive this settlement in the form of monthly $5,000 payments, it may be harder for this settlement to be wasted or spent too quickly.
• A structured settlement can serve as a steady stream of income. If you receive that same $75,000 settlement as a monthly $5,000 payment, you can rely on this money and use it to take care of some of the expenses you incur each month.
• Some structured settlements may result in higher total payments over time, even though their present value may be lower than a lump sum. If you are seeking a $300,000 settlement, the opposing party may be more inclined to agree to a structured settlement because the upfront cost to fund periodic payments can be lower than paying the same total in cash today.
• Depending on the terms you negotiate, a structured settlement could be paid over a very long time. If you negotiate a very lucrative structured settlement – $1 million, for example – and organize $10,000 monthly payments, you could be receiving these payments for over eight years.

The disadvantages of structured settlements

The main disadvantages of structured settlements include:

• You may be unable to continue receiving a structured settlement if something happens. For example, if a structured settlement is funded by a life-insurance annuity, payments are generally backed by the annuity issuer/obligor structure; if an annuity issuer becomes insolvent, Pennsylvania Life & Health Insurance Guaranty Association protection may apply, but only up to statutory limits.
• Paying off significant debt with a structured settlement can be challenging. If you get a $50,000 settlement and receive $3,000 a month, but owe $20,000 in medical bills, it may take a long time for you to pay off these bills.

The advantages of lump-sum payouts

The main advantages of lump-sum payouts include:

• You can receive all of the money that encompasses your settlement at once, without having to wait. If you get a settlement worth $250,000, you can receive the full amount in one large payment, meaning you won’t receive a portion and then have to wait a while before you can get the rest of it.
• You can invest this money and create a strong income stream.
• You can use the lump sum to pay off any debts that have incurred due to your injury. If you receive the $250,000 settlement mentioned earlier and owe $50,000, you can pay off this $50,000 debt right away.

The disadvantages of lump-sum payouts

The main disadvantages of lump-sum payouts include:

• In some cases, a lump-sum payout could be lower than the total value of a structured settlement due to insurance policy limits or present-value discounting.
• You may become ineligible for certain benefits programs if you accept a large, lump-sum payout.
• You could end up losing a lot of this lump-sum payout if it is mismanaged, or if people without the means to use the money properly gain access to it.

Structured settlement vs. lump-sum payouts: Which is better?

In summary, if you would like long-term predictable payments, structured settlements can be a good fit. By contrast, a lump-sum payout may be the better option if you need immediate access to funds.

Speak with a Pennsylvania personal injury lawyer today

If you were injured due to someone’s negligence, you may be entitled to compensation, depending on the facts of the case. Contact us today to speak with one of our Pennsylvania personal injury lawyers. KBG Injury Law is ready to help you.