Remember the “Hot coffee case” between the 79-year old woman Liebeck and McDonald’s back in 1994, the tort case between Bret Michaels – the lead singer of rock band Poison – and CBS, and the case of the trapped burglar in Bristol?
All these were intriguing personal injury stories and showed just how far personal injury claims have come over the years.
But what you probably didn’t know or haven’t heard much about is how personal injury settlements are paid.
Up until now, you probably think a defendant always pays the plaintiff the whole sum owed in a one-time payment.
But guess what?
It is not always so.
Yes, there are times when the plaintiff gets their settlement in a one-time lump payment. But many a time, especially in large tort claims, the settlement takes the form of an annuity. That is, payment is structured in a format usually agreed by the parties.
Note: If you’re struggling to lead your daily expenses and medical bills after a personal injury situation, go ahead and apply for pre-settlement funding. Pre-settlement funding are more like a cash advance on your pending lawsuit. When you’re finally paid your settlement, you can refund the money. And if you don’t win the case, you don’t have to worry about repayment. To learn more about pre-settlement funding, reach out to the experts on the Settle4Cash website today.
What is an annuity, and how does it work?
”An annuity is a financial product that pays out a fixed stream of payments to an individual. Usually, they’re structured for and paid to retirees. Annuities are contracts issued and distributed (or sold) by financial institutions, which invest funds from individuals. They help individuals address the risk of outliving their income. Upon annuitization, the holding institution will issue a stream of payments at a later point in time.”
As far as tort claims are concerned, the key takeaway from the definition above is that “settlements are made over a stream of payments.”
So, if a defendant chooses to sort a personal injury settlement by an annuity, what it means is that the plaintiff will get paid in tranches over an agreed duration.
But why would a defendant choose to pay a plaintiff via annuity?
Why break the payment down into tranches when you can simply pay in one go?
Most times, defendants offer to settle personal injury claims via annuity because their financial resources, including insurance, can’t cover a lump sum payment for the entire amount owed to the plaintiff.
Additionally, defendants also propose to settle a claim via an annuity because they know that annuities are always cheaper than lump payments in the long run because their cost depends based on the future value of current dollars.
So let’s say a defendant agrees to pay a plaintiff $1000 monthly settlements over a 60-month period to close a $60,000 settlement claim. The proposal could work to their advantage because in three years time, dollar could be worth more than it currently is. And a $1000 bill might just be equivalent to $800 or less.
Does personal injury annuity benefit plaintiffs in any way?
Going by everything we’ve pointed out so far, one might be tempted to assume that a personal injury annuity settlement will only benefit defendants.
But guess what?
That’s not completely true.
Plaintiffs enjoy some benefits from the system, too, like:
- Personal injury annuity prevents defendants from declaring bankruptcy: Did you know that in a bid to avoid paying you any settlement, a defendant can declare bankruptcy in court? If they do this, you’ll likely not get anything. So, if you were a plaintiff, wouldn’t you prefer to get compensated in tranches than to walk away with nothing at all?
- Personal injury annuity helps plaintiffs dodge tax: It is a well-known fact thata large lump sum payment will trigger significant tax consequences in some circumstances, resulting in a substantial loss of value. However, when you accept annuity payments, there’s a significant drop in the amount of tax you’re compelled to pay. Meaning that you get to preserve the value of your settlements.
- Personal injury annuity helps plaintiffs make the most of their settlement: Someone who receives a $2 million check may be tempted to blow the money on things they are not supposed to spend the money on. But when you spread the payments out over a given period, it becomes easier for the plaintiff to use the funds for the intended purpose.
- Personal injury annuity helps spread settlement to the plaintiff’s heirs: Personal injury annuity can also be a way for a plaintiff to ensure their heirs benefit from a settlement years after they’ve died.