Lump Sum vs. Structured Settlement: What’s the Better Choice?

Claimants involved in personal injury, wrongful death, and workers’ compensation cases have multiple options for handling their proceeds. While some may believe that a lump sum cash payment is the ideal method of accepting the proceeds, it may be more beneficial to place all or a portion of the proceeds in a structured settlement annuity¹. In fact, it is not uncommon to find that a structured settlement has provided a claimant with more long-term income than a lump sum.

Why isn’t a lump sum always the best option?

There are a few key reasons why accepting settlement proceeds as a lump sum may not be a good idea. First, one can’t overlook the emotional implications of a traumatic experience. After a catastrophic injury or the death of a loved one, most people would find the added pressure of handling a large lump sum of cash overwhelming.

Secondly, individuals who receive needs-based government benefits such as Medi-Cal and SSI will most likely jeopardize their benefits eligibility if they accept a lump sum. Most needs-based government benefits use an asset test to determine eligibility standards; if the claimant has more than $2000 in countable assets ($3000) if married, they will likely lose eligibility.

Third, the majority of traditional investment vehicles (i.e., stocks, mutual funds, etc.) don’t have a guaranteed return. If the market has a sudden downturn, so too does any settlement money placed in a traditional investment. Most investments in the open market also come saddled with fees and overhead expenses that vary depending on the type of investment and the institution through which the investment is being handled.

Finally, while the proceeds from personal injury, wrongful death, and workers’ compensation cases aren’t taxable, any growth on that income is subject to income tax—unless the claimant chooses a better option. That’s where the structured settlement annuity comes in.

Structured settlements: A tax-free income solution

A structured settlement provides many benefits that a lump sum cannot. For starters, both the settlement proceeds and any growth on the proceeds within the structured settlement are 100% income tax-free. The payments are guaranteed^1, and so is the rate of return. That means that even if the market takes a dive, the structured settlement payments remain constant. There are no overhead fees, and structured settlement plans are flexible in design, with options for monthly, bi-annual, or annual payments. For those who want a series of a few larger lump sums to pay for future expenses such as college or the purchase of a home, the larger payments can be worked into the schedule.

Here’s the best part: when you combine the lack of fees and the tax-free growth, a structured settlement often outperforms traditional investments. What better way for a claimant to maximize their settlement proceeds and have guaranteed long-term financial security?

Contact Traci Kaas to learn more

For more information about structured settlements, please contact me today.

¹ Structured settlement annuities provided through Sage Settlement Consulting. 

² Guarantees are subject to the claims-paying abilities of the issuing insurance agency.