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FAQ for Injured Persons
  1. Introduction
  2. What Do I Need To Know?
  3. How Big is the Tax Break?
  4. How Secure Are The Payments?
  5. How Do Structures Compare With Other Investments?
  6. What Are the Disadvantages?
  7. When Would I Get My Money?
  8. What Have Other People Done?
  9. How Do I Get Started?
  10. How Flexible Are The Design Options?
  11. What Is A "Settlement Broker"?
  12. Who Pays Them?
Home Page > "How to" For Injured Persons > FAQ

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.


*Insulation from ownership is what preserves the tax benefit under current IRS Rules.
Be aware that offers to advance cash to you in exchange for your future periodic payments do exist (both on television and the internet). Technically, this is possible but you should think twice before going this route. Not only does it take a long time (it must be court-approved in most states), it can be very, very expensive. You possess something of extraordinary value - a guaranteed stream of tax-free income - do not give it up lightly.

**See IRC Section 130.