Waiting for the settlement phase of your injury claim to roll around can feel like forever. For some, it never comes and litigation may be necessary. For most personal injury claimants, however, the claim will be resolved in a settlement. When the settlement phase finally arrives, you should be ready and have as much information as you can relating to the settlement process. There may also be options for how you receive your settlement. For instance, have you ever heard of a structured settlement?
What is a Structured Settlement?
When receiving a personal injury settlement, you have two options. You could take the settlement as a lump sum in the form of a check for the full settlement amount. The second option is to take the structured settlement amount and invest a portion or all of your settlement into a structured annuity that would pay out funds over time at a guaranteed interest rate.
Opting for investing your settlement in an annuity means you are entering into a legal contract with a life insurance company. You make a lump sum payment to the insurance company upfront. The insurance company then makes regular monetary distributions to you at the guaranteed interest rate over a certain period of time.
Structured settlements have been favored for their benefits for a number of years. In fact, back in 1982, Congress passed The Periodic Payment Settlement Act of 1982. The Act was a formal recognition of the government encouraging the use of structured settlements. After the passing of the Act, modifications were made to the Internal Revenue Code to exempt personal injury settlement proceeds from taxation if they were invested in a qualified structured settlement annuity. The fact that structured settlements are income tax-free is a big benefit. Personal injury settlements paid out as lump sums are generally subject to taxation. The guaranteed interest earned on an annuity, however, is tax-free. So, if you were going to invest any portion of your settlement, this might be the right route to take. Lump sum settlements that are then, in turn, invested in something like stocks will have interest earned on the investment taxed.
Another benefit of a structured settlement is a certain level of asset protection. Investing in annuities provides protection from other people being able to access and make claims against your settlement proceeds. In addition to preventing others from gaining access to the settlement funds invested, annuities also help ease the burden of managing the settlement funds that would otherwise fall on your shoulders.
You should, of course, talk to your attorney to see if a structured settlement is right for you. Talk about the potential benefits and implications of entering into a structured settlement. Not all structured settlements are the same and you are likely to have some options as to things such as how much you want to invest and the timing of the payouts you would receive.