What Is a Personal Injury Annuity?

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Personal injury cases can be a long and complicated process. In a successful personal injury lawsuit, whether it settles out of court or goes all the way to trial, the defendant is ordered to pay the plaintiff compensation for the costs related to the injury. This award will help support the family and can include lost wages and medical expenses incurred as a result of the injury.

You may be surprised to learn that personal injury payments do not always come in a lump sum payment. In some instances, a plaintiff’s cash award is structured as a combination of a lump sum and an annuity, where a series of fixed payments are made over a certain period of time.

If you have an ongoing or future personal injury case, you need to understand what a personal injury annuity is and the pros and cons of this option so you can decide whether or not this path is right for you.

What is an Annuity?

Personal injury annuities allow plaintiffs to recover their losses over a set period of time which can offer a number of benefits. When a settlement offer is made, the individual’s personal injury lawyer will explain the terms of the settlement and the annuity. This can help the individual with long-term financial planning and make it easier to manage the settlement funds. Annuities are popular and it is estimated that more than $6 billion in new structured settlements are generated each year.

Defendants have the option to settle personal injury claims via annuity if their financial resources, including insurance, cannot cover a lump sum payment for the entire amount owed to the plaintiff. Additionally, defendants also propose to settle a claim via an annuity because they know that annuities are always cheaper than lump payments in the long run because their cost is based on the future value of current dollars.

How Does a Structured Settlement Work?

Annuities are a kind of insurance product that guarantees a series of payments over the term of the annuity. The annuity might pay out over a beneficiary’s lifetime, or it may be tied to a certain amount of principal that continues to be paid to the beneficiary’s heirs until it is fully paid. If the plaintiff and the defendant agree on a structured settlement, the defendant (or the defendant’s insurance company) will negotiate the details as part of settlement discussions. The annuity’s total value, payment schedule and many other details are flexible and can be adjusted to meet the plaintiff’s needs.

Annuities are managed by specialized insurance firms. Since they are complicated financial instruments, annuities often need to be drawn up with the help of accountants and other experts who can advise clients on how the value of payments will change over time.

Almost everything about a structured settlement can be negotiated, including terms such as:

  • Length of the structure
  • How often you want to receive money (once/twice a year, monthly, weekly, etc.)
  • Amount of each payment
  • Whether you want a lump sum payment at the end
  • Whether payments end upon death or whether payments should continue to your heirs


Advantages of an Annuity

The lump sum settlement is the traditional method for settling a case and is typically the result in small settlements and most medium-sized settlements (less than $150,000). However, if you are settling a larger case, there are a few good reasons for doing a structured settlement.

Annuities may be a viable option in cases where the defendant’s financial resources, including insurance, cannot cover a lump sum payment for the entire amount owed to the plaintiff. During negotiations, the defendant’s only options may be to provide an annuity or to declare bankruptcy in hopes of escaping an unmanageable debt. An annuity can be significantly cheaper than a lump sum payment because its cost is based on the future value of current dollars.

The structure guarantees that you will not spend the money too fast. Sadly, many personal injury plaintiffs who receive large amounts in a lump sum spend the money in an astonishingly short amount of time and have nothing left in a couple of years.

The structured settlement also saves the plaintiff money on taxes. While personal injury settlements are not generally taxable, any funds received for lost wages or punitive damages are taxable. And you do have to pay taxes on the interest and dividends that you receive on the settlement money after you invest it. That can be a large tax payment every year. With a structured settlement, you have far less money sitting in the bank, and thus a much lower tax obligation.

Plaintiffs enjoy some benefits from the system such as:

  • Prevents Bankruptcy Claim

In an attempt to avoid paying a settlement, a defendant can declare bankruptcy in court. If they do this, the plaintiff will likely not get anything. Personal injury annuity prevents defendants from declaring bankruptcy.

  • Lowers Tax Consequences

A large lump sum payment will trigger significant tax consequences in some circumstances, resulting in a substantial loss of value. However, when you accept annuity payments, the amount of taxes you will have to pay will be lower, meaning that you get to preserve the value of your settlements.

  • Less Chance of Blowing the Money

Someone who receives a $3 million check may be tempted to blow the money on things they are not supposed to spend the money on. When payments are spread out over a longer period of time, it becomes easier for the plaintiff to use the funds for the intended purpose.

  • Benefits to Heirs

Personal injury annuity can also be a way for a plaintiff to ensure their heirs benefit from a settlement years after they’ve died.


Disadvantages of an Annuity

It is possible the defendant’s company will go out of business. If the insurer holding the annuity goes bankrupt, plaintiffs are still entitled to recover the money they are owed. However, this can mean delayed payments or no payments if there are not enough funds to cover the debts owed to all creditors.

Payments may also diminish over time. Since economic conditions are constantly changing, many companies include language that allows them to reduce payments when certain economic triggers occur.

There are also fees associated with annuity payments. These add up with each payment and can reduce the value of the principle very quickly. It is important for defendants to carefully go over and understand all the fees associated with the offer.


Advantages of a Lump Sum Settlement

The main advantage of a lump sum settlement is that you get the money right away. If you need the money to pay off bills, getting the money up front can be beneficial. Also, if the settlement simply is not that large, you get no significant advantage from a structured settlement.


Should You Speak with an Attorney?

Our legal team at Duque Law Group is comprised of award-winning and nationally recognized trial lawyers who collaborate with nurses, doctors and medical experts regularly. Though we understand the nature of injuries, we are not physicians, and always encourage victims to seek treatment as soon after an accident as possible, and to follow up and heed their doctors’ advice.

Call us now at 1-877-241-9554 to learn more about your options. A free consultation is just a phone call away.

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