Should you take a structured settlement?

A “structured settlement” means that you get a certain amount per month over a certain period (sometimes for life). It is to be contrasted to a “lump sum payment,” which means that you get all of the money all at once.

Pros

• The biggest pro of structured settlements is their tax advantage. If you take a lump-sum payment, you won’t pay any income tax on the settlement itself, but once you invest it, you will pay tax on the investment income. With a structured settlement, the settlement and the earnings are, in effect, rolled into one, and you pay no taxes on the monthly checks you receive even though they contain an element of investment income.
• Also, many people mismanage their lump-sum settlements, and fritter it away within a few years. By having a structured settlement, you’ll have a guaranteed income yet won’t be able to squander the principal.

Cons

• The money from your lump-sum is typically invested with a life insurance company, which then pays out the structured settlement. If the life insurance company goes bankrupt, you may lose your money. (Some structured settlements are government insured.)
• You lose control of the lump sum. For example, if after a few years, you would like to take the remaining amount and invest it all at once in a house, you cannot do this.
• You lose control of how the money is to be invested. The insurance company makes the investment decisions.
• The fixed payout amount can lose in value with inflation. So can a lump sum, but you presumably have more options in investing it in inflation-protected securities if inflation becomes a serious problem.

These are just some general guidelines. Only an attorney, possibly in conjunction with a CPA, can give you advice about your own situation.