Pros and Cons of Accelerating the Payout of Structured Settlements
In certain jurisdictions such as the United States (but less common in Malaysia), settlements for claims involving personal injury, workers compensation, guardianship, wrongful death lawsuits and even product liability may involve what is known as structured settlement. A structured settlement is basically an arrangement whereby the claimant get tax-free payment over an agreed period of time rather than getting the full payment in one lump sum upon settlement of their claim. This structured settlement is sometimes called annuity payment though the latter is usually subject to tax.
There are companies out there which now offer the claimant an option to sell their structured settlement for a lump sum payment instead and thus, accelerating the payment. This can be done as a one lump sum payment or partial lump sum payment (eg. you only opt to cash out half of your total structured settlement sum).
One of the advantages with such an accelerated payment is the perceived rigidity associated with structured settlement. The time factor (of having to wait) for the monies to be paid is one. Moreover, it would not be possible to add an additional beneficiary to the payee unless a court order is obtained (for obvious reasons). Another advantage of accelerated payment would be to cater for opportunity cost. The claimant may be able to use the accelerated payment to invest in certain investment vehicles which may give him better returns over the same period of time connected to the structured settlement.
On the other hand, staying put to the structured settlement may actually offer long-term financial security and protection to the claimant and in most cases, some form of interest has been factored in to compensate the claimant for having to receive his monies over a period of time rather than immediate. It is not uncommon for claimants to use a substantial amount of any lump sum payment within 3 to 5 years of receipt and if poor financial management was employed, the claimant may be left in a worst off position had he allowed the structured settlement to take its course. The other more obvious reason for not choosing an accelerated payout of structured settlement would be for tax reasons.
It is always recommended that before you decide to choose an accelerated payout, you should consult your attorney or even financial planner to ensure that you make an informed decision after weighing all the pros and cons.
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