Personal injury lawsuits are a tough thing to go through especially for those experiencing loss in a wrongful death case. Recommended is a great attorney to help guide you in your time of pain and need. Often times a step that becomes overlooked is the role of the financial advisor to assist with wise financial decisions at a time of distress.
Lump sum payments happen to be the major form of compensation in personal injury cases. This means that the defendant or defendants insurance company makes a one time payment that settles the case. However, instead of this one time payment, sometimes it is more beneficial for not only to the plaintiffs to do what is called a structured settlement, but is also beneficial to the prosecuting attorney. Instead of taking the one time payment in a large case settlement the plaintiff and his/her attorney which on average receives 33.33% receive a portion directly and the rest will be paid out in a period of years. The payments could last for the life of the recipient and typically create more of a payout than that which would have been given if just a lump sum. Often times there are major tax advantages to this option as well.
How does a structured settlement work?
If the defendant and yourself agree on a structured settlement the defendant or the defendants insurance company will pay you the lump sum. After receiving the lump sum a trusted fiduciary or financial advising company such as Westinghouse Financial will place it with a life insurance company that is highly rated. You want a highly rated company so that you know the company will not declare bankruptcy and always pay the proceeds. Most things in the settlement are negotiable such as the length of the structure, how often you want to receive the money (annual, semiannual, monthly, etc.), how much you want to receive each payment, and if you want to elect heirs to pass the payments along.
Sometimes there are unique cases such as when a minor is the plaintiff in a personal injury case and a structured settlement is a good idea to incorporate trust planning until the minor reaches a proper age. various other situations as well where the money would be better suited guarded and growing.
Products normally used in a structured settlement are called annuity products. You want a FA that can choose from dozens of companies to find the right one that fits your needs. The calculation for the annuity’s is normally complex using compounding interest, but the general principal is that it will pay you more money.
If you would like $2,000,000 in total paid out over a period of 20 years to you and if you pass away your heirs. That would be $100,000 a year. The defendant would be paying substantially less than the total $2,000,000 to receive compensation of $2,000,000.
There is a two main advantages in a structured settlement. One is that it guarantees you wont spend the money. More often than not when people are handed a large sum of money it does not last as long as they might have hoped. Second is there is a huge tax advantage. It is true that when you receive the settlement in a personal injury case it is not taxable, but when you put that money in an account you get taxed on the dividends and interest. that’s a large tax burden annually. There is much less money sitting in an account with a structured settlement and therefore less tax obligation.
As mentioned earlier structured settlements are not for everyone and it must be a large enough case generally consisting of more than $200,000. If you need the money now to pay off debt/creditors, buy a house, start a business, then you simply need a lump sum. For other situations such as the unique situation earlier or you understand the advantage of having more money for a longer period of time a structured settlement might be the right decision for you.
ask for a free consultation with your trusted fiduciaries at westinghousefinancial.com