Most people know that insurance companies pay settlements to injury victims. However, they may not understand the whole process. Although a personal injury attorney should handle your case when you seek compensation, you should know the basics of what may happen. This can help you make the right moves and plan for the future.
The Settlement: What Exactly Is It?
You likely know what a settlement is in its basic form. It is an offer from one party to another, generally used to compensate one party for the actions of the other. In other words, a settlement is someone paying for losses they caused someone else.
In the personal injury world, a settlement is a payment from an insurance company to a victim on behalf of an individual, business, or organization that caused the victim harm. Most personal injury cases never see the inside of a courtroom and are settled during negotiations between insurance adjusters and personal injury lawyers.
What Does a Settlement Pay For?
Personal injury settlements are compensatory by nature, meaning their purpose is to compensate victims for the damages caused by their injuries.
During the negotiations, your personal injury attorney will have a list of your damages (losses) and will fight to get as many of them as possible included in the calculations used to determine the compensation figure.
In most cases, settlements will cover these damages:
- Financial outlays related to medical treatment
- Financial damages caused by missed work, including loss of income
- Costs associated with employing assisted-care individuals
- Property damage, such as destruction to a vehicle or home
- Pain and suffering
Settlements do not cover punitive damages, however. Plaintiffs only recover punitive damages during a trial and never during settlement.
Types of Settlements
After winning a settlement for your injuries, you will need to communicate to your personal injury attorney how you would like to receive your money.
Generally speaking, settlements are disbursed in one of three ways—in a lump sum, as structured payments disbursed over time, or a combination of both. Depending on your situation, one may be more advantageous than the others.
You have various options for structuring your payments. However, once you set the payment method, it becomes difficult to change the terms. As such, it is helpful to speak with a personal injury lawyer to help you fully understand the ramifications of any decisions you make.
Lump Sum Settlements
Lump-sum settlement payouts are disbursed in one action. They are the most popular form of settlement payments, especially for injury victims who recover smaller settlements.
Once you receive and cash the settlement check, the insurance company is off the hook, closing the issue.
Advantages and Disadvantages of Lump Sum Payments
As stated, lump sum payments are a good option for individuals who receive smaller awards. Additionally, a lump-sum payment will give you much more control over your settlement proceeds and make more comprehensive financial moves than if you were getting periodic payments.
Perhaps you would like to use your proceeds for a home purchase or to finance a business. With a lump-sum payout, you can do just that.
One major disadvantage of getting a lump-sum payout is the risk of spending too much of the proceeds too quickly. Remember, the purpose of a personal injury settlement is to cover your losses, both present and future.
If you can’t resist the temptation to spend it, you may deplete the funds without wanting to, simply because the money is there and available.
Structured settlements are paid out over time in incremental payments delivered regularly, according to the set interval, which may be weekly, monthly, etc.
They help injury victims who win significant settlement amounts. Often, it’s easier for recipients to manage these large settlements through payments instead of all at once.
Advantages and Disadvantages of Structured Settlements
The one main drawback with structured settlements is the inability to use the entire proceeds of the settlement award to make substantial financial moves, such as investing in a business or equity or buying a house.
Aside from that, the many benefits of structured settlements can make periodic payments an attractive way to receive settlement distributions.
First, with a structured settlement, you cannot spend it all in a short time as you can with a lump-sum payout. So if you are easily tempted by large sums of money, as many are, then choosing a structured payment might be the best choice.
For injury victims with significant damages necessitating long-term and expensive care, the structured settlement is usually the most optimal payment method. It helps ensure the availability of money for medical treatment and other expenses in the future.
Structured payments may reduce your tax burden. While injury settlements are tax-free, the IRS taxes the interest, profit, and dividends you make on settlement money.
So if you make a significant investment with your lump-sum payout or even leave it in an account, you must pay taxes on interest and dividends. By choosing a structured settlement, you only have a portion of your settlement at one time to invest, which translates to a lower investment tax liability.
The potential for increasing payments makes structured settlements an attractive choice for many. Consider the settlement amount and the interest it will earn over time. As the value of the base settlement increases due to interest, you will also likely benefit from higher periodic payouts.
You can set up these payments to begin with larger amounts and decrease over time. A minor who needs less care and hence reduced payments once they reach the age of majority might prefer this method.
One potential disadvantage of structured settlements is the lack of control payees have once they have finalized the deal. They have no control over how the money is managed and do not find it easy or sometimes even possible to change the terms of the settlement agreement to better address their situation.
Combo of Lump Sum and Structured Settlements
You do not have to lock into one payment method or another for good. You get the best of both worlds with a hybrid lump-sum/structured settlement.
You can choose to get an initial lump-sum payout (smaller than the total settlement, of course) and receive periodic payments following that lump sum. You may determine the size of the lump sum and periodic payments.
In another hybrid agreement, the claimant gets periodic lump sum payments. These predetermined payouts come at predetermined periods for various reasons.
Often, personal injury victims will request periodic lump-sum payments to counteract cost-of-living increases and inflation and upgrade medical devices or equipment necessary for their ongoing care.
The Payout Process
What happens after your personal injury attorney seals the deal and wins you a settlement? Do you get a check in the mail or a direct deposit into your bank account once you decide which type of disbursement you want?
If you go with a lump sum, which most personal injury claimants decide to do, you will receive a check for the full settlement amount. If you choose to have a structured settlement, the payout will be a little more complicated, depending on the terms of the deal.
Generally speaking, the process will follow the following steps in most personal injury cases.
Signing the Release Forms
The release forms and other end-of-claim documents protect all the parties involved from future litigation on settled issues.
The release form typically comes from the defense attorney and outlines the specific terms of the settlement deal and includes terms barring you from pursuing further action against the defendant for the specific act they committed. Your attorney will review everything before you sign to safeguard your rights.
Insurance Company Cuts a Check
Once the insurance company receives your signed release form, it will promptly send a check to your personal injury lawyer.
Attorney Deposits Check and Pays Outstanding Obligations
Your personal injury attorney will deposit the check into an escrow account, deduct their fees and other costs, then pay all of the outstanding debts related to the case, such as:
- Unpaid medical bills
- Reimbursement to your insurance company for treatment costs
- Unpaid child or spousal support
- Payment to other attorneys who may have worked the case
They base the final total of their services on a reasonable, predetermined total agreed upon when you contracted them.
Usually, personal injury lawyers take cases on a contingency basis, which means they calculate their fees as a percentage of the settlement award.
Additionally, your attorney may have incurred costs while pursuing your cases, and they will deduct these costs from your payout.
Everyday expenses attorneys accrue during the compensation process include:
- Costs for hiring experts
- Costs for hiring investigators
- Court costs and filing fees
- Staff time
- Copying and faxing costs
- Travel expenses when representing the client, such as food and lodging
Your attorney may also deduct other fees and costs from your settlement. When hiring your attorney, understand what costs you will pay so it won’t surprise you later.
Questions to Consider When Choosing a Type of Settlement
When it comes time to decide which type of payment you would like, there are a few questions you can ask yourself that may make it easier to decide.
How Will My Medical Treatment Change over Time?
Do you expect to have medical bills for the long haul? If you expect long-term medical costs, you will likely do better with a structured settlement rather than a lump-sum payout. A lump-sum payout could risk you running out of funds for future medical care.
When Can I Get Back to Work?
Is returning to work soon possible, or do you expect to miss gainful employment for a long time? For those who expect to receive regular paychecks again soon, a lump-sum payment is not a bad idea as long as the work checks are expected to continue.
Have I Historically Been Good with Managing Large Sums of Money?
If the answer to this question is no, you should avoid taking a lump sum of money. The same tendencies with money you have always had will manifest themselves once you get your hands on the settlement proceeds.
Even if you believe you might behave differently, take the structured settlement if you might blow through a lump sum.
Do I Have Any Overwhelming or Significant Bills I Should Pay off With a Lump Sum Payment?
A lump-sum payment could ease your current debt load, which could, in turn, get you closer to your financial goals. Maybe you should wipe out a chunk of your mortgage or pay off significant swaths of credit card debt with your settlement funds.
Contact a Personal Injury Lawyer About Your Settlement Questions
If you have further questions regarding settlements and how they are paid out, contact an experienced personal injury lawyer for answers. You deserve to understand this process to make plans for your life.