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Let us say, you slipped and fell on a wet spot or had a forklift run over you. You might file a lawsuit and be offered a “Structured Settlement.” Should you take it?

What is a Structured Settlement?

Robert Stammers of Investopedia has defined a “Structured Settlement” as a financial agreement that pays you gradually over a set period of time after you win a personal injury lawsuit. It kind of works like the lottery where you can choose the lump sum payment or the monthly payments. The monthly payments option is a “Structured Settlement.”

The insurance industry uses the term “annuity” for this type of arrangement. This will pay for pain and suffering, lost wages, hospital bills, recovery and rehabilitation.

Types of Structured Settlements

Generally, you can choose either the “Buy-and-Hold” or “Assigned” method for ownership. With the “Buy-and-Hold” method, the winning party purchases an annuity. With the “Assigned” method, the annuity will be purchased by a third party.

You can also select different “Installment Payment Arrangements.” Choose to have equal or unequal payments each month.

The “Inflation Adjusted” settlement will ensure that your money receives a cost of living adjustment (COLA). You can link your annuity to a stock index. There is also a “Future Care” settlement option.

Advantages of Structured Settlements

Each individual will have his own special circumstances. If the injured party (plaintiff) is a minor, senior citizen or disabled (temporarily or permanently), then a structured settlement might be the best way to go. This can be placed in a trust and used to pay for on-going expenses.

Why wouldn’t you simply take the lump sum payment?

The primary benefit of the “Structured Settlement” is its federal tax-deferred status. If you receive a large lump sum payment, then the tax rate is likely to be very high. When you are paid over time, then your tax bill is likely to be lower.

The annuity is also better for those who are not financial management experts. Basically, if you have loose cash by itself, it is not earning any real returns. With an annuity, the insurance company can invest the money, until you need it.

Disadvantages of Structured Settlements

The problem with a structured settlement is that it might not cover your full monthly expenses. Of course, the same can be said for a lump sum payment. With a lump sum payment, you have more control over the funds. You also cannot modify a structured settlement.

With an annuity, you must hope for a check each month, this process involves counter-party risk. You don’t have all the money in your hands. What can you do if you need more money immediately?

Structured Settlement Secondary Market

If you want to raise money quickly, you could resell your annuity on the secondary market. Some individuals or organizations might offer 40% of the full amount. Be very careful because there are legitimate and illegitimate buyers.