Structured settlements are financial agreements which provide periodic payments. These are particularly effective as an alternative to lump sum settlements and are often issued for personal injury cases or as awards for a large amount of money.
Both options seem attractive enough. With structured settlements you are entitled to receive payments for a certain period of time. But with lump sum payments the funds can have more purchasing power if it is managed well.
If given the option between receiving steady payments or a lump sum, which is the better choice?
Structured settlements guarantee a steady paycheck but they can also be limiting if sudden access to emergency funds is needed. Lump sum payments can be used as an investment vehicle but those funds can quickly disappear if deals go sour.
The tradeoff for both options needs to be carefully weighed before a decision is made. If you have a structured settlement and are thinking of selling it, the following are factors to take into consideration.
Have an investment plan for the funds
It may be tempting to go on a shopping spree but doing so is financially irresponsible. Lump sums give you more flexibility but it also needs to be managed properly. Investing can grow your funds more than keeping them as structured settlements.
But it can also be risky even with signs of a growing economy. So where do you put your money into? They can be invested in stocks, mutual funds or even in real estate. Hiring an investment planner is definitely not a bad idea to help manage your funds.
Compare the tax benefits
Federal taxes are taken out for monthly pension payments but there are no taxes with a lump sum if they are put into an IRA account until they are taken out. For this reason alone, selling a structured settlement may be a much better financial option depending on your circumstances.
Lump sums can be transferred to beneficiaries
If you pass away unexpectedly the funds from structured settlements also end. This may not necessarily be an issue if the remaining amounts are modest. However, selling the settlement for a lump sum makes sense for a larger amount and as you get older so it gets passed on to family members.
Opportunities for spending your funds
Your financial situation may have drastically changed since getting a structured settlement. And selling it for a lump sum presents numerous opportunities that would otherwise have been unavailable to you.
With a lump sum payment you have the freedom for the following.
Pay off debt: If you currently hold high interest rate debt, then it makes sense to pay it off. Otherwise the interest payments will only negate potential returns.
Buy a home: The funds from selling a settlement can easily be used towards a down payment for a home or even used for renovation projects.
Start a business: With the economy steadily improving since the global recession, right now is a perfect opportunity to start a business and strike out on your own.
Receiving a lump sum is certainly an appealing option but caution always needs to be taken to ensure it is carefully managed.
Sean Carter is an experienced writer who has contributed to numerous blogs all across the internet. His main areas of interest include finance, technology and traveling the world.