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What Is a Structured Settlement?

You were seriously injured in a car accident. After several months, maybe years of litigation, your attorney tells you that she can settle the case for $2 million if you agree to a structured settlement. So what is a structured settlement? A structured settlement is an agreement between you and the defendant's insurance company in which you agree to dismiss your case in exchange for the insurer's agreement to provide you with periodic payments in the future. Instead of receiving the $2 million all at once, in what's called a "lump sum" payment, you will receive the money in partial payments over time. Is this a good idea for you?


It depends. The biggest advantage is that you will pay much less in taxes on the amount if it is a paid as a structured settlement. In some cases, the money could be tax-free. You can also arrange the payments to be made at a specified time in the future, such as a child's leaving for college. You can set aside a portion for payment of future medical bills if you will still be receiving treatment. If you have trouble managing your money, or will have problems with friends and relatives who may want to "share" in your settlement, a structured settlement could be a good idea.


The disadvantages are that you are relying on the insurance company or the company they purchase an annuity from to fund the settlement, to be in business for the rest of your life. If they go out of business, your settlement goes with it. If you die before receiving all of the funds, the remainder may not go to your estate or heirs. If you are financially savvy, or have good investment advisers, you could make more money by taking the lump sum settlement, paying the taxes, and investing the money yourself. Finally, if you change your mind, not all states allow you to sell your structured settlement for a lump sum. If you do sell, you will receive less money because the company buying it will be looking to make a profit from the sale.

Be sure to examine all of the benefits and disadvantages of structured settlements closely with your attorney. What's good for one injured person isn't necessarily good for all.