Structured Settlements vs. Lump Sum

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Often times when individuals have won a court case or are due compensation from an accident, they will be given the choice of a structured settlement or a lump sum.  The difference is that in a structured settlement, the money is paid in regular installments over a predetermined amount of time – while a lump sum is paid all at once.  Which one is better often depends on the circumstances surrounding the accident.

Structured Settlement Payments

With structured settlements, the money is not taxed.  This is in part due to tax changes made in the 1980’s.  The payments may be stretched over a few years time, or could last the entire life of the victim.  This depends upon the accident and how bad it was.  This money is meant to pay for pain and suffering, medical costs and possibly loss of work.

There are advantages to structured settlements, including the security of having guaranteed money over a period of time without being taxed for it.  Another advantage is that victims will often receive a higher amount of money when it is paid through a structured settlement.  The disadvantages include not receiving a large amount of money at one time; the victim is made to wait for the money each week or month the same way they would with a paycheck.  Another disadvantage is that it can often be difficult to make large purchases that are necessary with structured settlements.

Lump Sum Payments

A lump sum payment is a determined amount that is paid to the victim all at once, and although it has benefits, it also has some disadvantages.  The first advantage is that the victim receives a large amount of money at one time that he or she can use to make major purchases.  However, this money is taxed, so the individual will not end up with as much as if the payments were structured.

Another advantage of lump sum payments is that it allows the individual to invest his or her money in different things, should they want to try and make more money from the settlement.  The disadvantages include taxes and receiving a lower amount than they might have received through a structured settlement.  There is also no guarantee of money being paid at regular intervals.

Many individuals (especially older victims) often choose this option because they receive their money all at once and can then determine how to use or invest it.  They can also easily set up the beneficiary of that money in the event that something should happen to them.

Using this information, the victim should determine what option is best for him or her and their unique situation.  Although it’s a tough decision, understanding the advantages and disadvantages can help you determine which option to take.