Structured insurance settlement

What is a structured insurance settlement? It is an legal settlement that results from an insurance claim, usually from an auto accident. It is structured because the payments are payed over a period of time or the life of the individual receiving compensation.

Why not lump sum payment?

The reason you might choose a structured insurance settlement instead of a normal lump sum is two reasons

The total payout could be higher.
It guarantees a life of worry free tax free income from payments.
People waste payments upfront. Think of all the people who think they are smart with money but are not.

Insurance payments | My experience

Having worked both in the insurance industry and as an investment professional many people gravitate towards lump sum payouts, they are pure temptation. It is almost instinctive, as they would love to get a huge settlement hit their bank account. How can you not resist such temptation?

However, I have seen with my own eyes people squander their settlements. In fact, it is almost the rule. Even if the settlement is say 60,000 dollars, which is not a lot, you might want to consider taking it as a structured insurance settlement as will annuitize your income.

Further getting too money at once often ruins people’s lives as they do not have the wisdom to live a balanced life, just think of pop stars.

Did not take a settlement case 1

I know one guy named Ed who had a mild traumatic brain injury as a result of getting hit by a drunk driver. He got a one-time 70,000 dollar payout as a result of a settlement process and negotiation process that took about a year and a half between his lawyer and the insurance company (I think only about 1 in 10 cases goes to court). What did he do with his money?

This guy was highly educated and a seasoned investor. What he did was invested in low income rental real estate that at first looked like a good investment. But now this investment is worthless with the housing meltdown, it has since tanked. He is underwater in terms of his finances and the lump sum insurance settlement did not help his life at all on the contrary it hurt it in some ways. He was a player with girls now alone and in debt.

Personal injury settlement case 2

The second guy I know. Tim, also after about a year and a half negotiation process between his lawyer and this insurance company got a lump sum payout (his lawyer took an unfair allotment in my opinion as the payout was good and greed kicked in). This guy also a seasoned investment professional invested in stocks in an undiversified portfolio. His rational was if his stocks could just triple he would be set for life. He jokes he lost a Lamborghini. He lot most of his settlement.

Both these were normal professionals and very educated. You would think that they would know better. In fact every person including myself thinks they would do it different and know better.

Lump Sum or structured settlement | what would I choose

I would choose a lump sum payment. Surprised. Why? I am only human and I believe I can invest my money better than the simple steady returns a settlement that is structured would give. I feel even if I invested in the S&P index I could beat a structured deal.

What do I recommend to people. I recommend a structured insurance settlements in almost all cases. Even though the fixed payments do not give any tax advantage as both massive lump sums and smaller streams of income are non taxable, structured settlements are a steady consistent stream of income.

Therefore, no matter how foolish you or your family is with your money there will be a new payment next year. Structured payments are larger to compensate for the time value of money. Often with big windfalls people have a lot of family and friend pressure you do not need.
Further, people receiving these payments are people who most likely have a disability as a result of their car accident for example. They need steady income for a normal lifestyle not a one time payment to squander.

Medical advancement

I have noticed that medical advances are very rapid now days. If you could have money in say twenty years, the physical problem that you have, as a result of the accident could be cured, while today it can not. I believe in modern medicine and genetic healing in the future. If you do not spend all your money at once or get all your money at once in the future when a real cure might be available you might have the funds to help you. This is just a thought.