Disadvantages of a Structured Settlement
When someone wins a large settlement in a lawsuit, they may choose to take the money in installment payments rather than all at once in a lump sum. This method of payment is called a structured settlement. While a structured settlement may give you the peace of mind of regular payments, it also has many disadvantages.
Other People Are Reading
-
Inflexibility
-
While the regular, orderly payments of a structured settlement are nice, if you find yourself in a bind and needing money for a large purchase, your settlement terms may not allow you to borrow against the future payments. If you absolutely must come up with a large sum of money, there are companies that buy structured settlements, but you will lose money on the deal.
Loss of Investment Return
-
By taking a structured settlement, you lose the potential investment returns from investing a large lump sum payment. Depending on market performance, you could wind up with a lot more money in the long run from a lump sum payment. And most structured settlements do not index their payments for inflation, meaning your payout will have less purchasing power years down the road.
-
Costs
-
Structured settlements are set up like annuities, and there are both upfront and ongoing costs. Expertlaw.com says it's important to compare fees charged by insurance companies that do structured settlements.
Life Expectancy
-
Like annuities, structured settlements are often set up so that payments cease upon the payee's death. In this case, if you were to die unexpectedly, your family would not get the full benefit of your legal settlement. Expertlaw.com recommends that you set up your structured settlement to make a minimum number of payments or pay the balance to your estate upon your death.
Ineligibility for Public Benefits
-
Structuredsettlement-guide.com says that unless your settlement is set up correctly, the payments could disqualify you from receiving public benefits such as Medicare or Medicaid.
Possibility of Default
-
There is a chance that the company or person against whom you won the judgment will at some point become unable to pay. Structuring the settlement like an annuity and using an insurance company is supposed to guard against this, but it is also possible-- though the chance is very remote--that the insurance company administering the payments could go out of business or declare bankruptcy. For this reason, Expertlaw.com says it's a good reason to consider using multiple insurance companies for your structured settlement.
-
Resources
More Like This
Comments
-
This is misleading. First, there are no ongoing costs in a structured settlement. Second, the ineligilbility for public benefits has nothing to do with a structured settlement. It has to do with how much money you receive and how it is spent. Lump sums have exactly the same issues. And, finally, with a lump sum, all of the so called potential investment advantages vanish if the lump sum (which is now accessible) gets spent down. Most people do not have the discilpline to prevent dissipation. The annuity structure provides much greater peace of mind. So called "inflexibility" is, for some, their saving grace. What good is chasing a better return if the principal has been spent.
