Most small claim court cases will be settled with a lump sum agreement, allowing you to get the full amount of what the judge ordered. Larger claims or settlements that may require future compensation, such as an injury or disability case, may result in a structured settlement. You may even receive funds from a life insurance plan or 401K in the form of either a structured settlement or lump sum.
A structured settlement is where you get regular payments that go towards the larger sum of what you’re owed. A lump sum refers to receiving all of that money upfront. Fortunately, you are in full control over which option you’d prefer. Some people find that lump sum payments help them pay off debts and bills that have accumulated and others find structured settlements are helpful for routine monthly bills. A recent study has found that most claimants prefer structured settlements because of its tax-free and flexible status.
Understanding Structured Settlements
Structured settlements are often found in the shape of an annuity, being sold to you by a third party company, such as a life insurance provider. The annuity may even be vested in the U.S. Treasury, providing a tax-free flow of cash that is available at both federal and state level. The structured settlement works to extend the output given to you to handle your compensation. Oftentimes, you will wind up having more money if you choose to go with a structured settlement agreement as opposed to a lump sum.
Structured settlements can also be flexible to those who receive this form of payment. You can choose to receive a small lump sum if you have bills to pay upfront, but you can extend those additional payments monthly, semi-annually or annually. How you receive your money is totally up to you, further improving your case outcome. Keep in mind that if you deduct a larger portion of your annuity, you will pay tax on this amount. This is the only instance when tax is found in a structured settlement contract.
The only true downfall to taking out a structured settlement is that once you sign all necessary paperwork, you cannot change it. You will only be receiving your money as an annuity and if you should need a lump sum of money from the settlement, you won’t be able to obtain it. Once agreed upon, you cannot change how much money you receive and how frequently you get your checks in the mail. You also cannot change the amount you collect according to inflation of the economy.
Understanding the Lump Sum Cash Agreement
The lump sum settlement provides you with all of the money you are entitled to upfront. There is no waiting period, no annuity payments and no menial checks. If you have a substantial amount of money you owe right now or are planning to make a large investment, such as buying a home, the lump sum option is the right one for you. The biggest dilemma with a lump sum agreement is the amount of tax you pay to receive your money. Federal tax indicates that 20 percent of the amount of your lump sum be taken for withholding. This does not even include what your state will charge in tax, with some states taking just as much as warranted federal guidelines. This large tax could hurt you financially because you are getting almost half of what you’re actually owed.
Another predicament that people find when choosing a lump sum payment is how easy it can be to blow through all of the money at once. It’s easy to say that you’ll be responsible with the money once it’s received, but having all of that cash at your disposal is another story. Similar to how many lottery winners go bankrupt years after winning, lump sum recipients often find themselves staring at an empty bank account well before the money should have been gone. If you choose a lump sum settlement, it’s vital that you work with a financial expert to help manage that money so that it does not get blown on bad investments, frivolous purchases and poor financial decisions.
When receiving any type of settlement from court, 401K earnings, life insurance policies or death benefits, you need to weigh the good with the bad. Both structured settlements and lump sums have their advantages and disadvantages. Your decision depends on your current financial situation, your level of responsibility with large sums of money and an ability to foresee future issues involving finances.