Structured Settlements: Providing Economic Peace of Mind

[Enlarge Photo]

She was awarded a financial settlement for her injuries from her accident and faced twIn the event of a financial settlement in a personal injury case, structured settlements are a smarter long-term financial investment than one lump sum.choices: take the settlement as a onetime lump sum payment or receive the money through a structured settlement annuity contract, which would provide her with a future stream of payments exempt from state and federal income taxes.

While the lump sum was enticing, Megan opted for the structured settlement. As a young woman with limited investment experience and facing a lifetime of expenses associated with her injury, she recognized that she was too young to make long-term investment decisions associated with the lump sum settlement.

"I knew that while I couldn't change the circumstance I was in, what I could do was make the right decision for my future," says Megan. "So, I made a decision that would guarantee me money every month so I could focus on recovery and eventually on living my life." Today, Megan works for the World Institute on Disability as a leading advocate for people with disabilities. A graduate of The University of Texas at Austin, she is empowering people with disabilities to know the facts about financial planning.

Megan's situation is not unique. Each year, tens of thousands of people in the United States win settlements as plaintiffs in personal injury cases. During the expanse of time between court dates and depositions, many personal injury plaintiffs are unemployed and coping with injuries some times for years. This situation can quickly deplete savings and result in the need to borrow money from family or incur large amounts of debt. So when the verdict arrives in the plaintiff's favor, or a settlement is reached out of court, the idea of receiving a large sum of money all at once could be very attractive.

But many financial experts agree that structured settlement payments may be the smarter option long-term. "Many people view those who receive lump sum payments as just the recipients of a big financial windfall," says Susan Bradley, founder of Sudden Money Institute. "However it's important to remember that those involved in personal injury accidents are going through more than just a financial event, it's a life event. So it is vital for these people and their families to deal with this new reality carefully and take the time to make the best financial decision possible for their future."

Instead of taking a lump sum at the time of settlement, the injured party or the surviving family members in a wrongful death suit have the option of receiving payments for life via an annuity contract issued by a reputable life insurance company, such as American General Life Insurance Company (American General Life).

It is true that a lump sum can earn a considerable amount of interest when invested or placed in a high-yield savings account. However, the interest earned (not the sum itself) is subject to state and federal income tax regulations. This can add up quickly even on a modest settlement.

Structured settlements, on the other hand, are free from state and federal income taxes. Payments made are non-taxable by state and federal tax guidelines outlined in Section 104(a)(2) of the Internal Revenue Code.

"In addition to the tax benefits, structured settlements provide peace of mind and other benefits," adds J.P. Steele, president of structured settlements of American General Life and immediate past president of the National Structured Settlements Trade Association (NSSTA). "For example, the individual can receive a set stream of payments punctuated by larger individual payments to help cover major life events such as mortgage, loan payoffs, college tuition or ongoing medical procedures."

"Many people don't choose structured settlements because they're too safe," says Megan. "However, by opting for a structured settlement, having that safety and security allows them to take risks, like it did me, with the peace of mind knowing they have regular cash flow to meet their basic needs."

People should know about structured settlements even though the majority of Americans may never need to worry about using one, she adds.

To find resources on how to handle the major life decisions you need to make after you receive sudden money, contact the Sudden Money Institute at www.suddenmoney.com. To learn more about the benefits of structured settlements and to find out if this option is right for your situation, visit www.nssta.com or www.americangeneral.com/structuredsettlements.