Legal settlements are often thought of in lumps sums: $25,000 or $250,000 or even $2,000,000. While may settlements do arrive in lump sum form, there are also other options that a plaintiff can take.
If you want to avoid a one-time payment in favor of regular payments, you can choose a structured settlement, which can also come in the form of an annuity.
What’s the difference between structured settlements and annuities? Here’s what you need to know before making your decision.
What is a Structured Settlement?
A structured settlement is a method of payment that pays out your settlement over time in multiple payments. The payment is exactly the same as the lump sum. However, instead of getting one check, you can set up the payments in a way that makes sense for you financially, e.g. monthly, quarterly, or annually.
Structured settlements can help you manage a large payout, usually one in the high six or seven figures. Choosing one can help you manage your money and guarantee a fixed income. It can also help you manage the tax liability associated with any taxables. For example, the IRS now claims damages received for emotional suffering are income. Money for physical injuries is not.
However, they don’t always make sense for smaller amounts, as you might need the lump sum for other bills.
What Are Annuities?
Annuities are similar to a structured settlement in that you receive payments over time rather than a lump sum.
However, annuities also differ in a very important way. Whereas a structured settlement is merely the lump sum spread over multiple payments, annuities are a financial tool. When you purchase an annuity with your settlement, you’re buying an investment, usually an insurance company fund.
When you use an annuity, you have the chance to grow your earnings. Though, you are at the mercy of the market. You might even lose some money by choosing an annuity. However, annuities are relatively stable investment tools.
It’s also important to know that annuities are much less flexible than structured settlements. With a structured settlement, you can decide how much you want and how often. Once you buy an annuity, you receive an annual payment that isn’t customizable, particularly if you purchase a retirement annuity.
Should You Choose a Structured Settlement or Annuity?
Structured settlements and annuities are two types of payment plans available if you are awarded a settlement for a personal injury lawsuit. Both provide regular payments of the settlement amount over a set period of time. However, there are distinct differences, so it’s important to weigh your options carefully.
Remember that annuities are less flexible than other settlement options, so you should be sure of your income before you choose one.
Did you find this explanation helpful? Learn more about managing your money after winning a settlement with our Spending Plan and associated guides.