Most auto accident claims are settled out of court, and the proceeds are paid in a lump sum payment. However, there are situations when it's better to be paid through a structured settlement where you receive the payments over time. If you're considering this option, it's important to understand what a structured settlement is and when it may be in your best interest to agree to it.
What Is a Structured Settlement?
Under California law, victims are entitled to receive past and future compensation for their injuries from the negligent driver responsible for the crash. A structured settlement can be beneficial if you suffered a catastrophic or long-term injury that requires you to need medical care for your injuries in the future and your ability to work is limited. It's also helpful when the victim is a minor child and special procedures must be followed for getting the settlement approved by the court.
If you resolve your claim with the motorist’s insurance company and agree to a structured settlement, your payments are issued over time. You may receive an initial larger payment and then smaller amounts every month; or at set intervals over a period of years or throughout your lifetime. You can negotiate all the terms of the structured settlement so that it's tailored to meet your individual needs. This includes:
- Length of time you'll be paid.
- How often you want to receive payments.
- Amount of your first payment and the subsequent ones.
- Whether you want a larger payment at some point in the future because of higher anticipated expenses.
- Whether you want a lump sum payment at the end of your structured settlement.
- Whether you want the structured settlement to end at your death or to be paid to your heirs.
To ensure that you receive your entire settlement award, the other driver's insurance company will most likely purchase an annuity for you. It's an insurance policy or investment that guarantees that you will receive your payments over time.
Pros of a Structured Settlement
It's important to understand the pros and cons of a structured settlement so you know whether it's a good option for you. Even if you're fairly certain that you want to be paid this way, you should consult a knowledgeable car accident lawyer before making a decision. Here are some of the benefits you should consider.
You May Receive More Money
When an insurer pays you through a structured settlement, it may be willing to offer more than if you want a lump sum issuance. This is true because it most likely won't pay the full value of your settlement to the annuity insurance company. It may negotiate the payment amount based on a number of factors, like your life expectancy.
You Have More Financial Certainty
If you receive a large lump sum payment, at first it might feel as though you've hit the jackpot, and it's easy to think you'll always have enough to pay for medical treatments and have ample income. However, this isn't always the case if temptation or other family members enter the picture.
But, if you receive your payments over time, you're more likely to budget based on the steady stream of income you're receiving. This allows you to anticipate money to cover essentials and take care of you and your family.
You May Save Taxes
While the majority of your car accident settlement isn't taxable, you could owe income taxes on portions of what you receive, such as for the following:
- Lost wages and lost earning capacity
- Pain and suffering damages paid for non-physical injuries
- Punitive damages
- Interest paid on the settlement proceeds
- Interest and dividends you earn if you invest your settlement proceeds
When you accept your payments over time, you can spread out the tax liability over a number of years, rather than having a large tax payment for the year you receive the settlement.
Drawbacks of a Structured Settlement
Like most things in life, there are pros and cons to a structured settlement. Some of the cons include:
- You won't have full control of your money and may not be able to access it if you have an unexpected large expense in the future.
- You could make more money if you invest the settlement proceeds on your own.
- You might not understand the true value of the settlement if the insurance company doesn't disclose how much it's paying for the annuity.
- The payments could end prematurely if you die earlier than expected.
Are you considering accepting a structured settlement in your car accident case? Do you need help negotiating your settlement with the insurance company? Call my San Diego office or start a live chat to schedule a free case evaluation to learn how I can help you.