When Should a Personal Injury Plaintiff Decline a Structured Settlement?

Written by Christi Hayes and Fact Checked by The Law Dictionary Staff  

Personal injury settlements are paid out either as lump sum or structured payments. While with a lump sum settlement plaintiffs receive their entire settlement upfront, a structured settlement means their settlement is divided into smaller payments that are stretched out over a predetermined time frame. There are significant advantages and disadvantages to both types of settlements and choosing the best kind will depend on one's own personal and financial situation. The good news is that plaintiffs will often have a choice over whether to accept a lump sum or structured settlement. Below is a brief outline of why personal injury plaintiffs may want to decline a structured settlement in favor of a lump sum settlement.

Advantages of a structured settlement

Before discussing why a plaintiff may want to decline a structured settlement, it is important to first look at some of the advantages a structured settlement presents. Structured settlements make the most sense in cases involving large settlement amounts (i.e., over $150,000). By breaking up large amounts over an extended time period, plaintiffs will be able to benefit from their significant windfall without the risk of "blowing through" their entire settlement early on. Instead, a structured settlement acts as a guaranteed income. Additionally, structured settlements earn interest and are tax-free. Finally, these settlements are highly flexible and can be tailored to one's financial and medical needs. For example, a plaintiff can have payments increase planned to increase temporarily around times when he or she is scheduled for a major medical procedure.

When to decline a structured settlement

While structured settlements have significant advantages, the truth is that most plaintiffs opt for lump sum settlements and not without reason. Lump sum payments make particular sense in cases involving smaller settlements (i.e., less than $150,000). With a lump sum payment the plaintiff receives his or her entire settlement upfront. This method is particularly beneficial in personal injury cases where important and costly medical procedures may be an immediate concern and will have to be paid for quickly. Furthermore, unless inflation is built into the settlement itself, there is no guarantee that a structured settlement will keep up with inflation. With a lump sum settlement, on the other hand, a large portion of the money can be invested in order to gain a higher rate of return over time (note, however, that while a lump sum settlement is tax-free, money made from investing it is not). Because structured settlements also act as a guaranteed income, they could interfere with one's Social Security or Medicare eligibility. Finally, structured settlement payments are typically handled by an insurance company--if that insurance company goes out of business then there is the slight risk that the unpaid portion of one's settlement will be lost.

Choosing between a structured and a lump sum settlement can be a difficult decision and one that should only be made in consultation with an attorney and financial adviser. While in some cases a structured settlement will make the most sense, in other cases a lump sum payment will prove much more beneficial. Plaintiffs should understand the differences between these two settlement types in order to determine which one may best fit their particular situation.

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