The bulk of personal injury settlements are lump sum payouts. A lump sum payment occurs when the defendant (or the defendant’s insurance company) makes a single payment to you and the matter is resolved. Some claimants, however, choose to have their compensation paid out in a structured settlement rather than a lump sum payout.
A structured settlement is one in which the plaintiff receives a portion or all of the settlement sum over a number of years. The plaintiff and his or her personal injury lawyer will often get a portion of the compensation as a lump sum payment immediately after the settlement, and the remainder will be distributed over several years. Some structured settlements may include payments for the rest of your life.
What is a structured settlement and how does it work?
If you and the defendant agree to a structured settlement, the defendant (or the defendant’s insurer) will transfer the structured portion of the payment to a separate insurer, usually a life insurance firm that specializes in structured settlements.
How to figure out how much a structured settlement is worth
Let’s assume you wish to receive $100,000 each year for the next 20 years, with the payments continuing to your heirs if you pass away before the end of the period. The defendant will pay considerably less than $2,000,000 to finance the settlement, despite the fact that you (or your heirs) will get $2,000,000 over the next 20 years.
Because a structured settlement is a “future revenue stream,” it is referred to as such. In most cases, a future revenue stream must be estimated in terms of its present value. Present value is a financial concept that entails calculating the worth of a future revenue stream as if it were all sitting in a bank account right now.
To put it another way, how much money does the insurer need today in a bank account paying interest to pay you and/or your heirs $100,000 per year for the next 20 years? The short answer is that your structured settlement will be paid with far less than $2,000,000 in a bank account today. However, because this is a complicated financial calculation, your lawyer will almost always employ an economist to assist him or her in determining the worth of the structured settlement.
A structured settlement’s benefits
The conventional technique of settling a dispute is with a lump sum payment. You get a check from the defendant, cash it, and the matter is closed. For all modest and most medium-sized settlements (less than $150,000), you should take a lump sum payment.
However, there are two compelling reasons to use a structured settlement in a bigger case.
To begin with, the framework ensures that you will not spend the money too quickly. Unfortunately, many personal injury litigants who get significant settlements spend the money in a shockingly short period of time, leaving them with nothing two or three years later.
Second, the structured settlement reduces your tax liability. While the money you get in a personal injury settlement is typically tax-free, you will have to pay taxes on the interest and profits you receive after investing the money. Every year, that might be a sizable tax payment. You have considerably less money in the bank with a structured settlement, and consequently a lot reduced tax duty.
To learn more about the best options for your specific case, contact Law Offices of Fernando D. Vargas at 909-982-0707 for a free case evaluation.
