So you’ve just won your case. Congratulations! Now comes the part where you get a payout, right?
But, you might not be aware that there are different methods and structures that while still giving you the same set payment might result in different net money gained?
Basically, it means that there are settlements that are taxed, and others that are not. Welcome to the world of structured settlements.
Keep on reading for our full breakdown of what a structured settlement entails, and why it might be the right choice for you.
What Is a Structured Settlement?
In the simplest of terms, a structured settlement is a guaranteed annuity that’s tax-free. It does exactly what it sounds like, so it’s a settlement that is structured in a way that settles the claim for damages in a lawsuit with the payment divided over a specific period of time or for life.
They take the shape of installment payments and can stretch out over the period of five years, at minimum.
Besides, it follows suit to any other legally required or awarded compensation for wrongful death or injury, so these payments aren’t taxed. However, you’ll want to keep in mind that whatever portion of that settlement is used to create “gain,” or invested in one way or another, that amount will be taxable.
Moreover, there is a reason why these structured settlements are becoming more popular amongst every single party that’s involved in the case. For the recipient, they get a concrete tax-free cashflow with creditor-proof payments that can last for decades.
The insurance companies are also fans because the cash requirement for buying the annuity might be lower than the awarded damages.
When Should You Choose a Structured Settlement?
Traditionally, settlement payouts are paid to cover lost wages and future medical expenses that will fall on the shoulders of the injured party. So if you’re risk-averse, you should go with a structured settlement.
This money is essential for the victim’s financial well-being in the future, so most people would want to ensure that they stretch out for as long as possible.
Moreover, regular earnings on ordinary investments are taxable. Therefore, if a person would rather get their lump sum payment and invest it in a high-risk fund to get high returns, they run the risk of losing a huge chunk of money.
In addition to the annual management fees those funds tend to charge, they get to enjoy any income-tested government benefits and credits, if needed.
After all, structured payments are not considered to be income. Thus, people can still keep their eligibility for many government-based programs with no issues.
Giving Your Financial Future Self the Gift of Structured Settlements
We know that looking at the smaller monthly amount of a structured settlement and choosing it over getting a big lump sum amount can be a rather tough choice to make.
However, it’s a classic case of getting additional gains in the future vs getting satisfaction in the short-term. We hope our little guide gave you enough information for you to make a well-researched decision.
Speaking of research, there’s still so much more to learn. Check out our finance section for all the tips and tricks you could need to revive your financial health.