If I Have an Accident is the Insurance Settlement Paid in One Lump Sum?

Lump Sum Settlements

When defendants have the cash on hand to provide a large lump-sum settlement -- such as settlements provided by insurance companies -- some injured parties choose to take the settlement in a lump sum payment. While this large payment typically helps the injured party with large purchases, such as buying a home or a car with cash, those who opt for lump sum settlements usually receive less than they would over the course of a structured settlement. Lump sum settlements are also subject to income taxes in some cases, which may further reduce the bottom-line amount an injured person receives.

Other plaintiffs choose to have their settlement paid periodically and often negotiate an annuity-style payment from an insurance company to distribute their scheduled award. While the injured person must wait several years to collect her settlement amount, the annuity provides a predictable source of income for the plaintiff for several years. Because insurance companies can earn investment income on scheduled settlement money, scheduled awards are usually worth more than a lump sum payment. Most funds received from scheduled settlements are tax-free when structured as an annuity.

Plaintiffs who receive a structured settlement incur risk in their decision not to receive a lump sum settlement. While the return on settlement-based annuities is usually higher than on low-risk investments, according to the Foran and Foran legal website, they may be placed in an institution that becomes insolvent before the plaintiff receives the entire settlement amount. Economic conditions can also change over the course of the schedule, and an annuity that once supported a plaintiff may become no longer adequate for support.

Sometimes, plaintiffs who chose a structured settlement wish to "cash out" and receive the settlement's remaining value in a lump sum. Although regulations on the sale of annuities to third parties vary among states, most states require that the original plaintiff demonstrate legitimate financial need to a judge to transfer the annuity to another party. Plaintiffs who cash in a structured settlement often receive less than the settlement's annuitized value in the process.