How are personal injury settlements paid? The goal of personal injury cases is to help people recover what they lost. This includes seeking payment of medical, therapy, and care expenses. It also includes seeking compensation for pain and suffering, lost income, and other losses.
This might require going to trial. Often, personal injury cases settle out of court with an agreement between the injured person and the people who caused the injury.
A personal injury settlement should provide the plaintiff with compensation for his or her injuries. It also pays the legal fees and covers litigation expenses. The plaintiff gets to decide how they would like to receive their share of the settlement – all at once as a lump sum, or paid out over time as a structured settlement. Each option has advantages and disadvantages.
A skilled personal injury attorney can help you decide which is right for you.
Distribution of a Settlement
Upon receiving a personal injury settlement, the plaintiff’s attorney will first pay any expenses and fees connected to the claim.
Many personal injury cases are handled on a contingency basis. If the case is successfully resolved, the lawyer is paid a percentage of the award. If no money is awarded, the lawyer will not collect a fee. The client is responsible for paying expenses, such as fees for expert witnesses.
For example, if a jury awards an injured person $1,000 and the contingency fee were 50 percent, the law office would be paid $500.
Next, bills must be paid. Doctors and other medical professionals who treat an injured person can place liens on future settlements. Expenses might include investigators to establish what happened to the plaintiff and expert witnesses to testify about their injuries. Once the medical liens and expenses are paid, the rest goes to the injured person.
Disbursement of a Settlement to the Client
The plaintiff decides how they want to receive their settlement. There are generally two options: a lump-sum payment or a structured settlement.
A lump-sum payment means you would receive one settlement payment. A payout of this type has its advantages:
- Immediate access to all the settlement money;
- Ability to pay tax on any taxable portion of the settlement (as discussed in more detail below); and
- Control over how the money is spent or invested.
A plaintiff who chooses the lump-sum option should be prepared to make decisions about how to use the money, especially if their injuries have left them out of work or with long-term medical expenses. Once you receive the money, that’s it. You can’t go back for more.
Instead of receiving the money all at once, a plaintiff can choose to receive it over time as a series of payments. It is, in effect, an annuity funded by the settlement money. An annuity is a type of investment in which a person pays a sum of cash to an insurance company, bank, or other financial institution, and receives regular payments in return.
Because of interest or investment earnings, the total payments from a structured settlement could be a larger total amount than a lump-sum payment.
Annual Growth Rate
The financial institution managing the settlement pays the person an additional amount, commonly known as the return rate or annual growth rate.
For example, a plaintiff placed a $475,000 settlement into an annuity paid out over ten years, with a three percent annual growth rate. The person would be paid about $4,300 per month over that ten-year period. After a decade, the person will have received a total of $516,000, or $41,000 more than if they had taken the lump-sum payment.
A structured personal injury settlement can offer more flexibility than a lump-sum payment. Plaintiffs can decide how long they want to receive payments. They can receive payments for the remainder of their lives, or they can choose a specific length of time, such as five, ten, or twenty years. Payments may be scheduled monthly, quarterly, or annually.
The recipient of a structured settlement can also choose whether the amount of each payment should remain constant or whether it should increase or decrease over time. They could also choose to have the annuity pay a smaller lump sum at the beginning or end of the payment period.
A person might choose to receive larger payments early on, for example, if they have significant short-term expenses for medical care or rehabilitation. He could also reinvest the annual growth amount into the annuity, which would increase the amount of each payment over time. This option could be beneficial if the person expects the periodic payments to be their primary source of income and they want them to keep up with inflation.
In the alternative, a lump-sum settlement could be invested with similar payout schedules.
Selling a Structured Settlement
There are companies that will buy the remainder of structured settlements. In these transactions, the beneficiary of a structured settlement essentially signs over the right to future payments in exchange for a lump-sum payment. The lump-sum payment would be smaller than the total amount that remains payable on the annuity to provide the buyer profit.
A person might decide to do this if they have a sudden and immediate need for more money than is available through the annuity’s regular payments. In some situations, selling a structured personal injury settlement requires court approval. Many states have enacted a version of the Structured Settlement Protection Act, which regulates the sale of structured settlements.
Factors to Consider When Deciding How a Settlement Should Be Paid
There are several factors to consider when deciding whether to choose a lump-sum payment or structured settlement. They should consider their financial situation and their medical needs. They should also make an honest assessment of how they would handle a large cash payment.
Personal injury settlements are generally not taxed, with a few exceptions. Compensation that is specifically intended to cover lost wages could be treated as taxable income. Punitive damages are taxable. Any part of a settlement that reimburses a person for medical expenses could be taxable if the person has already claimed those expenses as tax deductions.
The way a person chooses to receive a personal injury settlement is likely to affect their taxes. If he chooses a lump-sum payment, he could owe income tax on any taxable portion of the settlement with their next tax return. If he opts for a structured settlement, the immediate tax impact requires careful calculation. Income from an annuity’s annual growth will be taxable as income, but the portion paid for personal injury would not be.
More information about the taxability of settlements is available from the IRS website: https://www.irs.gov/government-entities/tax-implications-of-settlements-and-judgments
Financial and Medical Needs
Some recipients of personal injury settlements have immediate financial or medical needs. Others will need financial assistance over a long period of time. A lump-sum payment allows bills that have stacked up to be paid immediately. A structured settlement can provide extended income to cover a long period of unemployment.
Before receiving a settlement, ask yourself: How will I handle this? If your injuries have affected your ability to manage your finances, you should ask your attorney about professional financial management services. A trust or managed account might be your best option.
You should also consider, and discuss with your attorney, if necessary, any concerns you have about family members or others around you who might become a concern. A large influx of cash can create issues.
A personal injury can be a life-changing event. In addition to physical and mental suffering, you could sustain overwhelming medical expenses and lose income and property. Experienced legal counsel can help you through a difficult time. Contact us today to schedule a consultation.