If you've been a Victim of Fire or Water Damage
The offer of a single large payment as an alternative to many smaller payments has its appeal. Many people can be temporarily dazzled by amounts of money they haven’t ever experienced before, much less collected for themselves. In the case of an insurance settlement, this kind of offer has a secondary appeal. It means the case is over, there will be no further hassles with the insurance company and everyone can get on with their lives.
Unfortunately for many insured people, especially those who have insurance tied to an employment obligation, contract or other multi-party arrangement, evaluating an insurance claim isn’t as simple as adding up a big amount and hoping it’s enough to cover all the future expenses.
If you are faced with the choice between a structured settlement, for example, an ongoing claim or accepting a single large amount in advance in exchange for you agreeing to drop your claim, here are some things to consider.
Short Term Thinking
Accepting a lump sum is a bet. Ultimately you are wagering on whether the amount you are accepting will cover all future expenses related to your claim and settlement. Depending on the circumstances that can be a risky wager. The simple fact that you can’t reliably predict the future should be pause enough to slow down and perform at least a cursory level of due diligence.
The major thing you must remember whenever you are considering your own financial security and balancing the risk of accepting a final settlement against the potential for the unforseen is there will be nobody there to back you up if you make a mistake. Once the money is gone, it’s gone and there will be no going back to try again if you wind up making the wrong choice.
It is to your benefit if you perform that due diligence. It might end up being the difference between having enough and not.
Taxes and Regulations
Accepting a large amount as a settlement for injuries may or may not have ramifications for your personal financial situation. Generally speaking, with certain very narrow exceptions, insurance settlements are not taxable. However, insurance settlements can have an effect on your eligibility for certain kinds of government benefits. Unless the funds are properly managed and are properly accounted for, you may find yourself stuck in a situation where benefits you may have been depending on are no longer available due to a lapse in eligibility.
These are issues that should be examined either by a certified accountant or an attorney well versed in the kinds of cases and claims you are involved in. Given the volume of regulations at both the state and federal level, the ability of the average person to navigate the management details for a large insurance settlement is limited. It is also an area where you can’t afford to make a mistake.
As both your accountant and your attorney will tell you, large amounts of money should not simply be parked in a savings account and dipped in to as needed. In order to obtain maximum benefit, you should prudently invest those funds in vehicles that will provide you with ongoing income. For example, you could purchase government bonds, municipal bonds or even a mutual fund that specializes in bond investments. Any of these investments will regularly throw off income with minimal risk to your principal.
The disadvantage to a lump sum, at least in terms of money management, is you are not only betting the money will outlast the unexpected, but you are also betting on timing the market. A far better outcome can be obtained by regular investments over time rather than a single large investment at any given time. This is partially related to the risking the unexpected problem, but it can amplify your misfortune if you invest in the wrong place or at the wrong time.
It is to your benefit to seriously consider any quick settlement offer. The insurance company is well aware of how much they can save by offering you a fraction of what your settlement is actually worth. This should be an invitation to you to take a close look at the details of your situation. It is also an excellent time to bring in an experienced and qualified attorney to evaluate your options and explain your legal obligations in the event you make one choice over another.