Many individuals who pursue financial compensation in a court of law are awarded a cash settlement, and these settlements may be the result of a personal injury accident case, a car accident case, a medical malpractice case or other types of cases. Some financial settlements from a court case or negotiations may be rather small, but others may be hundreds of thousands of dollars or more. The terms of some settlements require the financial compensation to be paid out to the plaintiff over the course of many years or even decades, and structured settlements are a popular option to use for these cases. They essentially roll the settlement funds into an annuity. While popular, there are a few things that you should know about this type of structure.
One of the key benefits associated with structured settlements is that the plaintiff can receive regular payments at guaranteed intervals. There will not be a concern about if the payment will be received on time or in the right amount when you set up a structured payment with an annuity or life insurance company. Generally, these payments may be established at intervals that are convenient for you. For example, some people will choose to set up monthly payments, and others may prefer quarterly or bi-monthly payments. This provides you with a great way to take greater control of your finances after you have been awarded a settlement.
A structured settlement is generally considered to be a high-yield and low risk investment. Generally, it can be challenging to find a legitimate investment opportunity such as this, and it may signal to some financially-savvy investors that this is a warning sign. However, when you set up structured settlements through a life insurance or annuity company that has a high or solid rating, you will indeed enjoy a great return with very low risk.
An Illiquid Investments
While a structured settlement is considered to be a low risk and high-yield investment, it is not without its drawbacks. The fact is that once funds are dedicated to this type of annuity structure, it can be difficult to cash in on the annuity structure and pull a lump sump of cash out of the fund. Essentially, once this structure is established, the money is committed to the established structure for the long term. If you run into an emergency situation or want to renovate the house, for example, you may not have access to the full amount of funds. While there are benefits associated with using these funds to establish a structured settlement, you should carefully consider what portion of the funds you want to establish into the fund. For example, you may consider keeping a portion of the settlement funds in a lower-yield yet more liquid type of investment and placing another portion into a structured settlement.
Your actual financial settlement is tax-free when it is received by you. However, unless you keep your funds under your mattress, you may be generating taxable income when you invest these funds. For example, if you purchase dividend-paying stocks, you may pay taxes on the dividends as well as the growth when you sell the stocks. With structured settlements, you will benefit from having payments that are tax-free. You may benefit from having a high return or yield on the structured settlement, but your payments are made to you free of tax liability. Essentially, when you diversify your portfolio and place some of your funds into a tax-free structured settlement, you can minimize your overall tax liability associated with investing your settlement funds.
The popularity of structured settlements is increasing, and there are now more options available for those who have received a court settlement to consider. These options provide you with the flexibility to select the right structured settlement arrangement that is right for your budget and financial goals. You can spend time reviewing some of the options available today. By taking this initial step and by researching other investment options available to you, you may be able to set up a portfolio that takes advantage of the benefits of structured settlements yet that also diversifies your funds so that you are financial secure for years to come.