What Are The Disadvantages?
Choosing a structured settlement does involve certain trade-offs:
- Limited Liquidity Once a structured settlement is established, you have no direct access to the funds. You can't change the payments or " cash them in".*
Practical solution: don't structure all the funds. Most people set aside an amount of cash at settlement to establish an emergency reserve. Many also build in a series of future lump sums, say every five years, for future liquidity.
- Default Risk This is the risk that the party responsible for future payments will not pay on time or in full. Although default risk is not unique to structured settlements, the extra-long duration of some cases (30, 40 or even 50 years) makes managing this risk a priority.
Practical solution: diversify. Instead of having all the funds come from one funding source, spread your risk among several.
- Limited Investment Choices Tax rules limit the universe of investment classes available for funding most structured settlements to two: government bonds and annuities purchased from state-regulated life insurance companies.**
Practical solution: work with what's available. The tax benefit will far outweigh this limitation in most cases.
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