The pros and cons of structured settlements in California
So you proved your Personal Injury case, and the defendant is ready to pay. You’ve been offered a structured settlement.
But you aren’t sure exactly what that means, right?
A structured settlement is a financial package that pays out in installments over a specified period of time. The way it works is that the defendant funds an interest-bearing annuity with an insurance company, and the insurance company agrees to pay you a guaranteed periodic amount from the return on the investment.
For example, if you received significant injuries, your settlement may guarantee you payments of $1,000 a month for the remainder of your life. Or, the monthly payments could continue on to your heirs for a certain length of time.
The arrangement is better for the defendant because the upfront expense is lower, since a portion of the money used to pay you is coming from future investment returns. For you, the arrangement has both pros and cons.
Pros of structured settlements
Tax benefits – You pay lower taxes on installment payments.
Financial protection – You are less likely to waste the money, lose it in bad investments, or have it stolen when it comes to you in monthly payments.
Simplicity – You do not have to worry about investing or managing the money. The insurance company handles all that and just sends you the check.
Cons of structured settlements
Financial limitations – You do not have the full value of your settlement at your disposal. For example, you cannot borrow against the total amount of future payments. Also, while structured settlement amounts account for inflation and increased medical expenses, those predictions could be wrong.
Lower returns – You would may make more money by investing a lump sum payment yourself because annuities offer extremely low rates of return.
Risks – You are not guaranteed that the insurance company holding your annuity won’t have financial problems. Or that the rate of return used to calculate the total amount you should receive will be accurate in the future.