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Payment through a structured settlement, rather than a lump sum, offers several advantages for the injured party. A structured settlement guarantees long-term income, which may be vital to someone who can no longer work. A patient who needs around the clock care or is confined to a bed will have the satisfaction of knowing that funds are available to pay for their long-term care. With these concerns out of the way, the patients family can concentrate on the care of the patient, rather than worry about maintaining the investments required by a lump-sum payout.
Studies have shown that nearly one third of those who are compensated for injury with a lump-sum payment spend all of the money within 60 days. Nearly 90% have exhausted their money in less than five years. For someone who may need care for years without being able to work, this should provide ample cause for concern. The last thing anyone who cannot work wants to be concerned about is bankruptcy. Structured settlements avoid these problems.
There are additional disadvantages to a lump-sum payment. The money must be invested wisely, and those investments require constant attention. A financial advisor will probably be needed to handle the funds, providing an additional and perhaps unwanted expense. The dividends from any investments are taxable, as opposed to a structure, which is tax-free. Furthermore, parties who receive large lump-sum payments are often victims of fraud, through bad investments or through hiring bad investors.
These problems can be avoided with a long-term annuity payment, which is free of tax at both state and Federal levels. The payments are smaller than a lump-sum, which may eliminate the need for a financial advisor. The absence of a large sum of money also keeps away the unscrupulous individuals who always seem to pop out of the woodwork anytime someone comes into a large sum of money.
These circumstances would be ideal for a long term annuity payment agreement:
- A victim dies and leaves minor children as survivors. The long-term payments of annuities can assure that the survivors have funds available for food, housing and education.
- Cases arising from workers compensation where the victim may be unable to work again for a long period of time, or ever. Annuity payments will make certain that the victim and his or her family will have continued living expenses.
- Other disabilities, either permanent or temporary, that may require a lengthy time for recovery.
The paying party can also find a structure beneficial, as the payments can be funded by the purchase of an annuity through a third party, typically an insurance company. The paying party purchases the annuity in present dollars, and investment income and inflation yield the remainder of the proceeds. Once the initial payment is made, the paying party need not be concerned with administration of the funds.
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