A personal injury settlement from a motorcycle wreck can be quite substantial, and it brings up the question of how to handle the award money. Oftentimes, the injured party must choose between receiving a structured settlement or a lump sum payment. Which one you choose depends on your individual financial situation, your medical needs, and the actual amount of the funds to be released. But there are some general benefits and drawbacks to each.
A Structured Settlement Offers Security
A structured settlement provides for tax-free payments to be made to you at regular intervals over a certain period of time, often for the rest of the payee’s life. When your personal injury expenses are expected to last for a long time, a structured settlement can help you avoid paying a significant amount of taxes and gives you stable, continuous income.
However, if you need a large amount of cash immediately to take care of medical bills or expenses that piled up since your accident, you may not find this favorable.
A Lump Sum Payment Offers Flexibility
Lump sum settlements are more flexible than annuity payments, because they allow you to do what you want with the cash immediately. However, a lump sum payment may run out even though the injured person still needs payments to survive.
With all these things in mind, many people prefer a lump sum settlement because it offers them the opportunity to do what they want with the compensation they are entitled to.
Converting Structured Settlements To A Lump Sum Payment
You won’t always be given the choice to choose between a structured settlement and a lump sum payment. Sometimes you will simply be given a structured annuity, and you must work with these funds and how they are distributed. In cases where a structured annuity no longer works for you due to increasing medical bills or the need to make a major life change, you may be able to convert a structured settlement into a single lump sum by selling the annuity to a third party. Laws vary by state, so check with a financial expert. You should be aware, however, that the lump sum you will receive will be less than the total amount of the payments you’re selling.
Choosing Your Settlement Type
If you have an injury that will affect you for the rest of your life and you will incur expenses on a consistent basis, a tax-free structured annuity may be more reasonable. This is also true if you have dependents. You may be able to decide later to cash out your annuity by using a third party, but make sure you are conscientious about your funds. The Structured Settlement Protection Act safeguards your rights if you decide to cash out your annuity.
If you have significant medical and living expenses that need to be paid immediately — or if there are other good reasons that a large lump sum of cash would be beneficial — consider a lump sum payment. In either case, always consult with a financial expert to see how your money can best serve you.
The author, Amanda King, is a CPA and certified financial planner.