Generally, when you secure a personal injury settlement, you have two choices for payment: lump sum or structured settlement. Your preference may depend on the compensation amount and the extent of your injuries. While your lawyer may have some suggestions, here’s a quick guide to how your payments might work.
A lump sum is, as it indicates, a settlement payment all at once. It is the best option for smaller settlements that are not worth a slow payout over time.
Lump sum payments are tax-free and liquid. You can choose whether to invest it or use it for a large purchase. Many people choose a lump sum if permanent disability requires new adjustments for their futures. For example, if you need a wheelchair and wish to customize your car for your new circumstances, a lump sum payment makes it easier to finance that project.
The disadvantage of a lump sum it is easy to squander. Some people may use up the money quickly to buy toys or lavish vacations rather than plan long term.
A structured settlement pays out in monthly or quarterly payments. It is an excellent option for permanent disability because it provides guaranteed income. Also, if you are the conservator for a minor child who sustained personal injuries, a structured settlement makes it less likely the child will squander it on their 18th birthday.
Structured settlements earn interest as long as funds remain. So, choosing this option rewards your patience as you receive more money than the original settlement amount over the long term. The extra interest better assures your future and the needs of your family.
The disadvantage to structured settlements is you will not choose how the funds are invested. But if you hire a qualified structured settlement broker, they will likely make informed decisions that maximize the settlement’s value.
There is also the general risk associated with an investment. If you feel risk-averse, you can choose more conservative investment options. There is always the option to switch your investments later if the economy turns in your favor.
If you find you need a large sum of money later, you can consider cashing out your structured settlement. However, many services underestimate the value to receive the largest long-term payout possible. So, if you believe you may need a larger payout later, it is likely best to choose a lump sum payment, invest some of it in an annuity, then use the balance to meet other financial needs.
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