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- Updated: June 20, 2023
- This page features 5 Cited Research Articles
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Understanding Structured Settlements vs. Lump-Sum Payments
When you secure a legal victory against a person or a business that has caused you harm, you may be entitled to monetary compensation. This compensation can be delivered in a lump sum, where the entire amount is given at once, or through a structured settlement, where payments are made over a set duration.
Each method of receiving money has its own advantages and disadvantages. You should think carefully about these before deciding which way is best for you.
Defining Lump-Sum Payments
A lump sum is the most straightforward way of receiving the money you’re owed. It involves a single payment where the entire amount is delivered at once.
This onetime payment fully covers what the other entity owes you. In some cases, the settlement may involve a series of lump-sum payments made over time.
Understanding Structured Settlements
A structured settlement involves receiving your compensation in installments over an extended period. For instance, you could receive a specific amount every month for 20 years. These payments are typically tax-free.
Source: The Joint Committee on Taxation
Structured Settlement Lump-Sum Hybrid
Sometimes, it’s beneficial to use both types of payments — lump sums and structured settlements — to best serve the injured party.
In this scenario, the person might get a substantial first payment to take care of urgent needs and pay bills. After that, they would get a series of smaller payments spread out over time. This arrangement allows them to handle both immediate expenses and secure a steady income for the future.
Examples of Payouts by Case Type
Structured settlements and lump-sum payments each come with their own advantages and disadvantages, and the choice largely depends on the specifics of the case as well as the individual’s personal needs and financial circumstances.
Understanding the nuances of these payment methods in various contexts will help you make an informed decision should you find yourself in a similar situation.
Structured Settlement Cases
According to the National Structured Settlements Trade Association (NSSTA), structured settlements are commonly used in serious personal injury cases. NSSTA explains that structured settlements are particularly good in certain situations.
Structured Settlement examples include:
- Disabilities: Structured settlements can provide consistent financial support over time for individuals with disabilities.
- Guardianship: This could involve children or adults who are considered incapable of managing their own affairs. The steady income from structured settlements can help guardians manage costs.
- Workers’ Compensation: When a worker is injured on the job, structured settlements can help cover their long-term financial needs.
- Wrongful Death: In cases where a family loses a loved one due to someone else’s actions, structured settlements can provide the surviving family members with a regular income.
- Personal Injury: For serious injuries, especially those requiring long-term medical care, to cover living expenses or support a family, structured settlements can provide necessary financial assistance over time.
Lump Sum Cases
Lump-sum payments might be the best option in certain situations. While the choice depends on the specifics of the case and the needs of the individual, there are some general scenarios where lump sums could be preferable.
Lump sum examples include:
- Breach of Contract Cases: These cases typically involve a specific amount of money that was promised but not delivered. A lump-sum payment can effectively resolve the dispute and allow both parties to move on.
- Employment Disputes: Cases involving lost wages, such as wrongful termination or discrimination, often work well with lump-sum payouts, as the amount can be calculated based on past wages and lost future earnings.
- Property Damage Cases: If your property, such as a car or a house, has been damaged, a lump-sum payment can help you repair or replace the property quickly.
- Small Claims: In cases where the settlement amount is relatively small, taking a lump sum is usually easier and more convenient than setting up a structured settlement.
- Divorce Settlements: In some instances, a lump-sum payment can simplify a divorce settlement. This is especially true when one party needs immediate financial assistance or wants to finalize financial ties with their ex-spouse quickly.
- Cases with Less Severe Injuries: If the injury isn’t expected to cause long-term health problems or require ongoing medical care, a lump sum might be more suitable.
Remember, each person’s situation is unique and it’s important to consult with a financial advisor or an attorney before making this decision.
Pros and Cons By Payout Type
It’s important for people to understand the benefits and drawbacks before deciding how they want to receive their money from a lawsuit. This decision can significantly impact your financial future.
Structured settlements can offer long-term financial stability, but it also comes with certain limitations. Let’s delve into the key advantages and disadvantages of structured settlements to help you make an informed decision.
Pros and Cons of Structured Settlements
Benefits of Structured Settlement Payments
- Long-term Financial Support: You are guaranteed to receive money over a long period of time, which can help with your regular expenses and long-term needs.
- Protection Against Poor Investments: With a structured settlement, you're shielded from the potential negative impacts of bad investments. The steady, scheduled payments provide a reliable source of income.
- Reduced Pressure to Give Money Away: Since you don't receive all the money at once, there's less temptation to share or donate large amounts right away.
Drawbacks of Structured Settlement Payments
- Limited Access to Funds: With a structured settlement, you can't access the majority of your settlement money whenever you want. You'll only receive payments according to the agreed schedule.
- Difficulty with Unexpected Expenses: If you have unexpected bills, such as a medical emergency or a major repair, you may not have enough ready cash from your structured settlement to cover these costs.
Opting for a lump-sum payment can provide immediate financial relief and control over your funds. However, it also presents certain risks, including the potential for mismanagement and investment losses.
Let’s look at some of the benefits and drawbacks of this choice.
Pros and Cons of Lump-Sums
Benefits of Lump-Sum Payouts
- Immediate Access to Funds: With a lump sum, you get all your money right away. This can be particularly helpful if you have urgent needs like paying off debts or covering large expenses.
- Freedom to Invest: Having a large amount of money at once gives you the opportunity to invest it. If you make wise investment choices, you could potentially grow your money over time.
- Full Control: You have total control over how you use your money. You can use it as you see fit without waiting for scheduled payments.
Drawbacks of Lump-Sum Payouts
- Mismanagement Risk: Having access to all the money at once could lead to poor spending decisions. If you're not careful, you might spend the money quickly and have little left for future needs.
- Investment Risks: While investing can grow your money, it can also be risky. If your investments don't do well, you could lose some or even all of your money.
- Tax Implications: Depending on the nature of your case, a lump-sum payment could have tax implications. It's important to consult with a tax professional to understand the potential tax consequences.
Deciding between a lump-sum payout and a structured settlement is a major decision. By understanding these pros and cons, you can make an informed decision about which option is right for you. Consulting with financial and legal experts can help to guide your choice.
Selling Your Structured Settlement for a Lump Sum
If you’re receiving money through a structured settlement, there may come a time when you need more cash right away than your payments provide.
Maybe you’re faced with surprise bills, or your life circumstances have changed after a costly situation like becoming widowed. You might need to fix up your home or buy a new one, or you need help paying for college.
If you find yourself in these situations, you might consider selling your structured settlement payments. There are companies that specialize in buying these types of payments.
If you’re interested in exploring this option, our trusted partners may be able to help. Please reach out to us to see if we can assist you.
5 Cited Research Articles
- National Structured Settlements Trade Association. (2023). Frequently Asked Questions. Retrieved from https://www.nssta.com/structured-settlements/faq
- National Structured Settlements Trade Association. (2023.). What are Structured Settlements? Retrieved from https://www.nssta.com/structured-settlements
- Butner, S. (2019, December 12). Are Annuity Payments on Lawsuit Settlements Tax Free? Retrieved from https://pocketsense.com/annuity-payments-lawsuit-settlements-tax-free-9730.html
- Congress of the United States Joint Committee on Taxation. (1982, December 22). Summary of The Period Payment Settlement Act of 1982. Retrieved from https://www.jct.gov/publications/1982/jcx-58-82/
- National Structured Settlements Trade Association. (n.d.). Structured Settlement Annuities: Safe, Secure and Highly Regulated. Retrieved from https://nssta.com/sites/default/files/library/2016/2016-10/StructuresAndAnnuitySecurity_0.pdf