If you win a claim against your employer, your insurer or some other party, your compensation is more than likely going to be offered to you in the form of a structured settlement rather than a cash settlement. This means that you will receive a certain amount of money each year for a fixed number of years – an annuity
For example, let’s say you are injured at work or in a traffic accident and as a result a you are to be compensated $2 million in the form of a structured settlement. In line with the trend in recent decades, the defendant agrees or offers to purchase an annuity for you (there are companies such as ING, and many brokers with whom individuals, companies and their lawyers deal with when it comes to obtaining structured settlement annuities).
structured settlement
It’s easy to see how someone might imagine that they have been awarded a very large amount of money, after all $2 million is a big sum. However, because the principle known as the time value of money, this 2 million is not at all what it seems. In fact, it’s only worth about $850,000 in today’s money.
We can say this because if you had $850,000 to invest today, in 20 years time that money would have grown to $2 million. That’s why you should not quickly agree to a structured settlement. You need to consider the offer very carefully, and there are other factors which could mean that the settlement may not even cost the defendant $850,000 (such as deals with insurers). So, the defendant may prefer a structured settlement annuity rather than a cash settlement.
In many cases you would be much better off with the cash settlement. When you have cash, you can invest money how you want. You might decide to buy a house, to invest some of the money in shares, to pay off debts, or even to buy an annuity yourself, an annuity with a better yield (for example, a variable annuity).
Individuals who have already agreed to accept a structured settlement annuity may be permitted to sell it for cash. The lump sum can be invested or used in the ways described in the previous paragraph. There are brokers who specialize in cash for annuity. Naturally, the individual selling the annuity needs to be aware that he will lose some of its value, and there are fees to consider.
Those who have been awarded a cash settlement need to consider carefully how the money will be used. As we have seen, when money is invested wisely it can grow considerably. The temptation however, is to go on a spending spree! And that’s one of the reasons why structured settlements are preferred (especially by judges).
Beneficiaries of a cash settlement would be very wise to consider investing at least some of it in an annuity. That money will go to work and in less than one year it will produce a nice cash flow. Some of the cash settlement can be used to clear bills or make a major purchase, and some of it can be used in other investment vehicles.
Either way, before accepting any kind of settlement, or before spending a cash settlement, talk to a couple of good financial advisers.
