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Lump Sum Payment
vs Structured Settlement Payment,
Which is Best?
Structured settlements offer several
advantages that make them a popular choice with
individuals. The foremost benefit of a
structured settlement is that it provides cash
at regular intervals and the money is free of
state as well as federal taxes. As against
this, the interest accrued from investments
made from money obtained through a lump sum is
subject to federal and state tax. Also, very
often individuals who come into money by
acquiring a lump sum are unable to invest it
wisely and often spend it wastefully, this is
not possible with a structured settlement where
small amounts are made available periodically
and therefore a person’s spending is
regulated.
Loss of money that has been acquired through an
installment of a structured settlement is not
as severe as loss of money acquired through a
lump sum payment. The small amounts are easy to
manage and also do not excite the interest of
unscrupulous elements as compared to hefty lump
sum payments.
With a structured settlement, an individual
does not need to worry about planning for
long-term investments as the periodic payments
can be structured to take adequate care of
one’s needs post retirement or in the case of a
debilitating injury. Structured settlements are
favored by both the defendant and the plaintiff
as they can be settled without having to go to
court. This saves time and is often cheaper for
the defendant who would otherwise have to pay
more with an in-court settlement. The risks
involved for both parties are reduced with a
structured settlement as per which the
defendant is contractually bound to pay the
plaintiff. Also, attorney costs for a
out-of-court negotiated structured settlement
are lower than what they would be if a
litigation were to be filed in court. Attorney
fees can come down by as much as 8% to 10% for
a structured settlement achieved out of court.
This can mean a saving of thousands of dollars
for the defendant as structured settlements can
often run into more than a million dollars.
Structured settlements allow insurance
companies to provide payment to claimants at a
lower cost and the payment schedule can be set
according to a claimant’s convenience. A
structured settlement can be used to provide
for certain costs of an individual right from
the stage when he is a minor. The money can be
disbursed for college expenses or to meet the
costs of higher education. Periodic lump sums
made available to an injured person can be used
to make medicinal purchases and sustain
oneself.
One reason for the popularity of structured
settlements is that they can be availed in a
variety of formats; these include lump sum
payments made periodically when funds are
required for medical expenses, education, or
marriage; percentage increase annuities that
offer annually increasing payments that help to
counter inflation; deferred annuities that
enable to defer the commencement of payment to
a later date; period certain annuities that can
be combined with a lump sum payment for
receiving payment over a fixed period; and
joint and survivor annuities in which payments
are continued to the survivor annuitant if the
primary annuitant passes away.
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