What You Need to Know Before You Agree to a Structured Settlement

Often, in order to avoid going to court and wasting money on costly court fees, liability cases will be settled among the two parties and their lawyers. The defendant agrees to pay money for damages to the plaintiff, and this sum can often be hundreds of thousands of dollars. Very few people have this money on hand to pay in one lump sum and be done with it. Instead, the settlement money is structured into regular payments that last over an extended period of time. The defendant is now able to pay damages to the plaintiff without going bankrupt in the process.

It sounds like a good deal from both sides of the bargaining table. The defendant surely won’t be happy about having to pay money in the first place, but regular payments is better than having to take out a loan, get a second mortgage or sell the house to make ends meet (if they’re lucky, the defendant will have a good insurance plan that pays most of the settlement anyway). The plaintiff is typically happy to get what amounts to an extra paycheck every month. This guaranteed, passive income also accrues interest over time, just like an investment.

So clearly it’s a win-win, right? Well, there are still some things to think about before you agree to a structured settlement.

Negotiate a Structured Settlement Carefully

The terms of a structured settlement are negotiable, but only in the beginning. Once the settlement is agreed upon, you will have a very difficult time changing the terms down the road. At that point, your best option is to sell your structured settlement payments, but you often will lose money doing this.

So think hard about whether you’d like to receive payments on a monthly basis, twice a year, yearly, or on an entirely different schedule. If you tend to make a lot of impulse purchases, maybe a once-a-year payment option isn’t such a good idea; weekly or monthly payments will help you manage your money better.

You can also opt to receive a lump sum payment up front and the rest of the settlement in structured payments. This is an attractive option if you are unable to work due to injuries or you have a lot of medical expenses to pay for. The lump sum payment can help you get back on track financially.

Other payment options exist that are useful for planning for retirement. You can turn your structured settlement into a comfortable retirement savings fund by choosing to have the payments increase over time (i.e., you’ll receive more money as you age and get closer to retirement), or to even delay payment altogether until you reach a certain age or choose to retire. On the other hand, if you receive payments well before retirement, you could possibly invest them and earn an even greater passive income over time.

There’s even a possibility of receiving payments over your lifetime, which is a great proposition if you expect to live a long and healthy life; you’ll have a stable income during retirement this way for sure. However, it can be a bum deal if you are in poor health and have a short life expectancy, because your payments will often be non-transferable. In other words, your family won’t receive a penny of your settlement money after you die.

When to Decline a Structured Settlement

If the money you’re owed in the settlement is less than about $100,000, the advantages to having payments spread out over time aren’t very high. There’s also little chance that you’ll earn much interest on smaller settlement payments. In this case, a lump sum payment is just as useful and helps you take care of your current financial needs, without having to wait around for the rest of the payments.

But if you’re owed something like $1 million, that’s a different ballgame altogether. It is much easier to spread this amount of money out over the course of 30 years or more, giving you ample time to benefit from the structured settlement annuity and helping you manage such a large sum of money responsibly.