If you have been involved in a minor or moderate personal injury case, it might make the most sense to take a lump sum payment to resolve your claim. However, annuity settlements are often recommended for cases that involve serious injuries and that require ongoing treatment or involve a permanent disability.
There are many factors to consider when deciding between annuity settlements vs. lump sum payments, and it helps to know the pros and cons of each one.
What is a Structured Settlement?
Structured settlements are often used to award injury plaintiffs with smaller increments of money over an extended period of time rather than all at once. They can help you avoid spending all of your money at once and plan ahead for your financial future.
Structured Settlement Annuity & Annuity Payments
The majority of structured settlements are administered in the form of an annuity, which is typically issued by a life insurance company. There are two main types of annuities: deferred annuities, in which your money is invested for a period of time before you receive payments, and immediate annuities, in which you begin to receive payments right away.
Pros and Cons of Lump Sum Payments
The main benefit of a lump sum payment is that you have access to all of the money you are entitled to right away to do with what you wish. This can be helpful for paying a mortgage, current medical bills, college tuition, or investing in a new business.
However, many people struggle with the responsibility of financial management and end up spending their settlement too quickly. This can be devastating later in life, especially if you lose your job or face unexpected bills.
Pros and Cons of Annuities
The benefit of an annuity is that it provides a steady source of income and is tax free at the federal and state levels (Of course if the money is invested, the interest may be taxable). Unlike a lump sum of cash, you can actually grow the size of your settlement through smart investments with an annuity. Contrary to popular belief, annuities can also be flexible and allow you to pay large medical bills up-front and then disburse the remaining sum over time. These payments are predictable, and many of them are insured by the government.
However, it’s important to understand that some parts of a settlement (whether it’s structured or provided in a lump sum) can be taxable, including punitive damages and attorney’s fees. You might not always have access to the money you want immediately if you choose to put it in an annuity. And annuities aren’t just for personal injury settlements; they’re also popular financial planning options for retirement.
Deciding between Lump Sum or Annuity
Ultimately, the decision between choosing a lump sum or annuity is a personal one that you should discuss with your family and a trusted financial professional who has your best interests at heart. This is your financial future at stake, so don’t take this decision lightly!
*Novation is not a financial advisor and/or consultant and strongly recommends that you speak to a lawyer and/or accountant before making any significant financial decisions.