A structured settlement is a payment made to the victim of a personal injury claim as compensation. The victim can be compensated by a lump sum amount, a structured settlement or a combination of both. Generally when the dispute goes to a Court, the judge most often awards lump sum payments. Therefore a structured settlement can only be used when the dispute is settled out of the Court. A structured settlement is an option that should be considered in any major injury case.

There are certain advantages and disadvantages associated with structured settlement. These advantages and disadvantages apply to both the Plaintiff and the Defendant.

One main advantage of a structured settlement for the Plaintiff is that all periodic payments are tax free to the recipient in contrast to lump sum payments where interest earned from plaintiff’s investment is taxable. The other advantages are the fund can not be spent too quickly and carelessly and the money is managed without any cost to the Plaintiff.

Some disadvantages of structured settlement for the Plaintiff are the fund is locked at a fixed interest rate and cannot be cashed out from the settlement at a later date. Since the annuity is set at a fixed interest rate, if the inflation rate increases and becomes higher than the indexing rate, the purchasing power would be significantly reduced.

An advantage of the structured settlement for the Defendant is cost saving. It is much cheaper to purchase and annuity than to invest a lump sum which would provide same stream of net income for the Plaintiff. Also the structured settlement may contain clauses which may ensure that the remaining payments are made to the Defendant in case the Plaintiff dies before expiration of the guarantee period.

The disadvantages to the Defendant are the Defendant is responsible and liable for all payments for the duration of the annuity and a need for bookkeeping for taxation purposes.