The Advantages and Disadvantages of Structured Settlements
Below is a MRR and PLR article in category Finance -> subcategory Other.
The Pros and Cons of Structured Settlements
Overview
A structured settlement is a financial arrangement where, instead of receiving a lump sum of cash, a claimant receives tax-free periodic payments. These settlements are commonly used in cases involving guardianship, workers' compensation, wrongful death, and severe injury.Benefits of Structured Settlements
One major advantage of structured settlements is the long-term financial stability they provide. Unlike lump sum payouts, which can be quickly depleted, structured settlements ensure ongoing financial support. Studies show that 90% of large cash awards are exhausted within five years due to poor financial management.
A key benefit is the tax-free nature of the periodic payments and any capital growth. For instance, consider a scenario where a claimant can choose between a $1 million lump sum or $2 million spread over their lifetime. While the $1 million itself is tax-free, any interest earned on it would be taxable. Conversely, the lifetime payments totaling $2 million are not subject to income tax.
Drawbacks of Structured Settlements
The main downside is perceived inflexibility. For example, adding a spouse’s name to the settlement typically requires a court order. Those who are risk-averse might believe they could achieve higher returns by investing a lump sum themselves. However, it's worth noting that the regular settlement payments allow for a strategy known as "dollar-cost averaging" in investments.
Selling Structured Settlements
Some companies offer to buy structured settlement payments in exchange for a lump sum. If you consider this option, consult a trusted attorney first. These transactions are increasingly common, prompting more than 35 states and the federal government to enhance consumer protection laws and establish strict regulations.
In summary, while structured settlements provide financial security and tax advantages, they may lack the flexibility some claimants desire. Always seek professional advice when exploring these options.
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