Imagine that you’re offered a choice. Sitting across the table from you are two piles of money. One is very big, and you can take it all home with you today. The second pile is pretty small, but you can come back next month to get the same amount — and every month thereafter for as long as you want. Which deal do you take?
Many people who receive lottery winnings or are granted settlement money after an injury or accident are faced with this exact scenario. Most people would instinctively grab for the larger pile of cash. Why wait around when you can use that lump sum to reduce debt or buy a new car?
Unfortunately, structured settlements, annuity settlements, and lump sum payouts are not quite that straightforward. There are certain strings attached to each kind of deal that every claimant should know before making their final decision.
In fact, structured settlement annuity benefits often outweigh their disadvantages. Here are some of the ways that taking that smaller pile of cash might be smarter in the long run:
- It’s tax exempt. In most cases, the money you receive from a structured settlement or annuity plan won’t be included as taxable income. That means more of your earnings stay right in your pocket.
- It keeps you honest. Many people don’t know how to budget a sudden windfall of cash in a way that’s sustainable. Statistics suggest that 25-30% of accident victims use up all of their settlement funds within two months of recovery, and 90% exhaust the money within five years. If you’ve suffered an accident that prevents you from working, how will you survive financially if your dry up all of your funds too quickly? A structured settlement plan ensures long-term security and a steady stream of income.
- You always have the option to sell. Structured settlement annuity benefits are nice, but sometimes you really doneed a chunk of cash to pay for unanticipated medical expenses, to put a down payment on a house, or to send a kid off to college, for example. You can sell all or part of your structured settlement at any point in its duration to a financial institution for a lump sum payout. This gives you the flexibility to use your money as you see fit, exactly when you need it.
So which pile of cash should you take? The answer is ultimately up to you. The structured settlement annuity benefits might be appealing, but for some people — especially minors — taking the lump sum to invest the money yourself can prove more rewarding over time. Consult with a lawyer, financial planner, or certified accountant to weigh your options and decide which deal is right for you.