If you’ve recently won a major legal settlement or lottery payout, congratulations! A life-changing windfall of money just fell into your lap. But now comes the million-dollar question (perhaps literally): How do you take that lump sum and ensure it lasts to support you for the long haul? 

For many recipients, the answer is found in structured settlements – having that total payout repackaged into a stream of periodic payments disbursed over several years or even a lifetime. It’s almost like taking your winnings and investing them into a sort of income annuity tailored just for you. 

On its face, the structured settlement seems like a pretty smart move from a financial planning perspective. You immediately remove the temptation to blow through the entirety of your windfall all at once. The recurring payments insulate you from anxieties about running out of money too soon while still providing a comfortable cushion. And there can potentially be some great tax advantages compared to taking the entire lump sum. 

But as is often the case with anything involving America’s complex legal and financial systems, structured settlements quickly get…well, complicated. With the allure of a big tempting lump sum dangling in the rearview, plenty of settlement recipients end up having second thoughts about their decision to build out a long-term payment plan. And a bustling secondary market has emerged giving people those coveted cash equivalents through companies happy to purchase structured settlements. 

So, are these periodic structured payments really the wisest path? Or are you better off charting your own investment course with your financial windfall? Let’s take a look at the key pros and cons… 

This information is provided for educational and informational purposes only. Such information or materials do not constitute and are not intended to provide legal, accounting, or tax advice and should not be relied on in that respect. We suggest that You consult an attorney, accountant, and/or financial advisor to answer any financial or legal questions.

The case for structured settlements 

A few common reasons why periodic payments could be preferable: 

• • Financial discipline and asset protection: Having compensation tightly structured for disbursement over years or decades enforces financial discipline – the money quite literally cannot be spent all at once on lavish splurges. It protects the recipient from themselves and malicious parties looking to swindle them out of a lump sum. 

• • Tax advantages: While each situation is unique, structured settlement payments are generally more tax-advantaged compared to taking a fully taxable lump sum upon initially receiving your award. Consult experts, but the potential savings could be substantial. 

• • Investment upside: Structured settlements are often invested conservatively into annuity products or U.S. government-backed securities. While this limits potential investment upside compared to more aggressively allocating a lump sum, the steady stream of payments is guaranteed. 

• • Government assistance: For recipients who may qualify for needs-based public assistance programs, keeping assets tactically lower each year through structured payments preserves more eligibility than having a single large lump sum get counted as income all at once. 

The case for lump sums 

A few common reasons why periodic payments are less favorable than a lump sum: 

• • Loss of liquidity: Even though you get paid over time, once those periodic structured payments are set up, accessing the full value of your settlement in cash becomes very difficult and costly. You sacrifice liquidity for the sake of forced long-term money management. 

• • Fixed payment amounts: Your structured payment amounts get locked in at the time of your settlement award. While this provides stable income certainty, you lose the opportunity to capitalize on potentially higher market returns on investments you could have managed yourself with a lump sum. Inflation can steadily erode purchasing power. 

• • Debt obligations: Taking a structured settlement may create challenges if you need to borrow against funds or maintain certain cash reserves for things like paying off a mortgage. The periodic payments aren’t considered available assets for lenders to count. 

• Secondary market fees: While you can technically sell your future structured settlement payments to a third party company for an upfront lump sum cash advance, you’ll get significantly less than the full value after accounting for exorbitant fees these companies charge.