When dealing with civil law, especially personal injury lawsuits and legislation involving accidents, plenty of potential lawsuits never see the inside of a courtroom. This is because the plaintiff accepts a settlement from the defendant or, very often, from the defendant’s insurance company. In order to reach a settlement, the plaintiff agrees to discontinue the legal action, and the defendant or his or her insurance company agrees to arrange for payment. That payment could be all at once in the form of a lump sum, or could be over time in the form of a structured settlement. Structured settlements result in plenty of payouts over time and the total amount could be higher because the entity paying has more time to pay. As explained in FindLaw, “With a structured settlement, a defendant’s insurer typically funds an annuity policy for the plaintiff. An annuity produces a continuous stream of income over the term of the structured settlement. Annuity contracts can be quite complex to cover a variety of expected expenses.”
“A structured settlement may provide a plaintiff with a substantial tax benefit,” the piece continues. “Many lump-sum settlements are considered income and must be claimed on tax returns. Funds received from an annuity are tax-free as long as the plaintiff does not control the funds. Plaintiffs who receive lump-sum settlements often spend everything within five years. Afterwards, many become dependent on the government for their support. With a structured settlement, the funds are preserved throughout the time of plaintiff’s disability. Annuity funds must be managed by a professional. Proper financial planning will help make sure plaintiffs have enough funds to cover future expenses.
Parties may tailor annuities to cover a plaintiff’s specific needs and all sorts of future demands or contingencies.
In most states, annuities are protected by state insurance laws that guarantee the obligations of a bankrupt insurer will be covered. A lump-sum payment may be combined with a structured settlement to meet immediate expenses, such as medical bills, repayment of debts, rehabilitation costs, and the like. Parties can dedicate funds of a structured settlement to cover unanticipated advances in medicine so that if medical science develops a miracle cure, the plaintiff can give it a try. A structured settlement may allow parties who are far apart in their settlement negotiations to close the gap and reach an agreement acceptable to both the plaintiff and the defendant.”
Among the liabilities of a structured settlement are the fact that if the plaintiff “retains too much control over the structured settlement proceeds, the IRS may look at the situation and decide that the tax break must be forfeited.
A plaintiff may fear that, no matter how the settlement protects against negative economic conditions such as inflation or recession, unknown changes in the economy could make the annuity payments too small. Sometimes, an annuity is placed with brokers who do not have sufficient protection for insolvency (when financial obligations outweigh assets).
Insurance companies are usually reluctant to disclose how much they will have to pay to buy an annuity covering the amount of the settlement. A structured settlement frequently costs insurance companies much less than it would to make a lump-sum settlement. Without this information, however, the plaintiff’s attorney may not be able to make a complete assessment of the benefits and drawbacks of a settlement offer. In many circumstances, a settlement may be a faster, cheaper, and less stressful alternative to trial. An experienced personal injury attorney can discuss the facts of your case with you and help you decide whether a structured settlement would be your best interests.”
A structured settlement can be sold for a lump sum of cash now. Because the “present value” of money, particularly in an environment of high interest, is lower than the amount of the deferred payment, the lump sum received is typically less than the total value of the annuity payments. The assumption is that the borrower is willing to exchange that higher total value for the benefit of the lump sum funds immediately. In other words, money now is worth more to the person spending it than a greater amount of money later, but in the eyes of the lender, the exchange is one of a greater amount of value in future payments versus the cost to the lender of the lump sum paid out now. But should you sell your structured settlement? Should you borrow against all or part of it? For that matter, should you even accept a structured settlement in the first place?
“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,” writes Kathryn Vercillo. “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.”
Among the reasons Vercillo explains you might accept a structured settlement include the benefits to you financially, depending on what the structured settlement includes. “You pay less in taxes and may even pay nothing at all,” she writes. “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. You are [also] 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.”
There are certain drawbacks inherent to structured settlements. For example, you may be carrying a large debt load, and if that’s the case, paying this off when your settlement is trickling in over time may not keep you ahead of the bills or of the interest payments on those bills. Some structured settlements are the results of a long-term issue that results in heavy legal or medical bills, for example, and in those cases, a lump sum is a lot more attractive an option.
“ Structured settlements don’t help you to make large purchases [either], she goes on. “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.”
“Because there are pros and cons to structured settlements,” Vercillo concludes, “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.”
So if you do accept a structured settlement, should you accept a loan against it? The settlement may have seemed like a good idea at the time, or the extended payment structure may have been what was offered but you may now be thinking that a lump sum payment would meet your immediate financial needs better. If that’s the case, you still have options, and taking loan against all or part of your structured settlement is one of them.
Ava Lawson writes, “if you have successfully resolved a lawsuit and have agreed to periodic installments of your money over time, you are receiving a structured settlement. While this arrangement fulfills legal obligations to both parties, structured settlements can have their drawbacks, especially when unforeseen expenses occur, and large sums of cash are needed right away. [You can therefore] sell your structured settlement payments for one lump sum payout, giving you immediate access to money when you need it most. This type of funding is known as a structured settlement loan, and it’s saved many people from dire straits. Settlement loans take those prolonged installments out of the equation, giving you cash today. This isn’t a traditional loan like you’d apply for at the bank, but rather a cash advance on your periodic payments that you’ve agreed to receive. … Structured settlements function well for many people, as they can provide security for a child’s financial future, or supply a steady flow of money for lifelong medical conditions. And many plaintiffs enjoy the tax incentives that go hand-in-hand with structured settlements. However, there are certain times when life’s unexpected surprises present the need for large sums of cash, and that’s where settlement loans are instrumental. Use the money any way you wish: make a down payment on a house, pay for college tuition, cover medical expenses, or reduce existing debt – the decision is yours.”
“Wisegeek” sums it up nicely: “By obtaining the structured settlement loan, settlement recipients do not have to wait for annuity payments to arrive in order to pay off pressing debts. The proceeds from the loan make it possible to retire those debts and begin to make a series of installment payments to pay off the loan, plus the interest applied to the loan principal. In some cases, the installment payments may be structured to coincide with the schedule for the annual or semi-annual settlement payments, although monthly installments are often required. Going with a structured settlement loan is often a practical solution, especially if the settlement is the result of a protracted legal battle that has left the recipient with a great deal of debt to settle. The loan provides the ability to resolve all those different debts, leaving behind the one loan to manage. From this perspective, the structured settlement loan can be seen as a means of providing a great deal of peace of mind, as well as simplifying the management of personal finances. Lenders who provide structured settlement loan options to clients will often base the amount of the loan on a percentage of the actual settlement. Typically, that percentage will be somewhere between 70% and 90%. This strategy helps to ensure that even if the debtor is unable to keep up payments at some point during the life of the loan, the annuity payments can still be claimed and used to settle the loan in full. As a result, the lender assumes less risk for approving the loan, and is more likely to offer a competitive rate of interest as part of the structured settlement loan terms and conditions.”
Contact Infiniti Funding today to learn more about your structured settlement and how a structured settlement loan could conceivably help you to meet your immediate financial needs. We are happy to discuss your parameters and tailor our solution to them.