In 2019 alone, around 2.8 million Americans suffered from a non-fatal injury or illness that came from their workplace. On top of that, there are around 6 million car accidents every year as well.

While many of these incidents get resolved through basic healthcare and some bargaining between insurance companies, some of them end up in court. When someone wins their case or reaches a settlement agreement, they typically get some kind of payment.

The payments often come as structured settlements. Not sure what a structured settlement means? Keep reading for our guide on what a structured settlement is and when they make sense.

What Is a Structured Settlement?

In a structured settlement, a business or insurance company offers a series of smaller payments over time. For example, a company might offer $50,000 a year for 20 years to resolve a million-dollar settlement. They will typically buy a structured settlement annuity to make the actual payments.

There is a great deal of flexibility in the exact arrangement of any given structured settlement. You might ask for a larger first payment to cover any outstanding debts you accrued from medical care, with the balance divided over time.

If you’re negotiating a structured settlement, you can always sit down with a structured settlement calculator to see how different payment options will play out.

When is a Structured Settlement a Good Idea?

A number of factors can make a structured settlement a good idea. If you get the settlement because of an injury that prevents you from working, annual payments can effectively replace your salary for years.

You must also consider the tax implications. While you get a pass on compensatory damages in terms of taxes, punitive damages are another matter. A big lump sum settlement of punitive damages can cost you a lot in taxes.

The taxes generally prove gentler when you break those payments up over time.

Managing a Structured Settlement

Structured settlements generally make sense for most people, since they offer some longer-term financial security. Of course, the longer the settlement period goes on, the more likely it is that your situation will change.

You may suffer a major health setback or decide you want to buy an investment property. When those things happen, you generally can’t restructure the original settlement.

What you can do, however, is sell the original settlement for a lump sum settlement. While you take a loss on the value of the original settlement, it gets you access to a substantial amount of liquid capital fairly quickly.

Deciding on Structured Settlements

Now that you can answer the question of what is a structured settlement, it puts you in a position to make an informed decision about them.

If you suffer from poor health or lack any heirs who can inherit the settlement, a lump sum offer might make sense. If you’re in reasonably good health but can’t work anymore, a structured settlement offers you a level of ongoing financial security.

Looking for some more finance tips? Check out our Finance section on this site.

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