In a successful personal injury lawsuit, whether it settles out of court or goes all the way to trial, the defendant is ordered to pay the plaintiff compensation for the costs related to the injury. The defendant or the defendant’s insurer typically pays in a lump sum. In some cases, a plaintiff’s cash award is structured as a combination of a lump sum and an annuity, where a series of fixed payments are made over a certain period of time.
How does an annuity work?
Annuities are a kind of insurance product that guarantees a series of payments over the term of the annuity. The annuity might pay out over a beneficiary’s lifetime, or it may be tied to a certain amount of principal that continues to be paid to the beneficiary’s heirs until it is fully paid. The details of an annuity are highly flexible and can be negotiated as part of settlement discussions. The annuity’s total value, payment schedule, and many other details can be adjusted to meet the plaintiff’s needs.
Annuities are managed by specialized insurance firms. Because they are complicated financial instruments, annuities often need to be crafted with the help of accountants and other experts who can advise clients on how the value of payments will change over time. A $1,000 monthly payment today will be worth substantially more than the same amount in twenty years. Understanding this principle is a key part of evaluating whether an annuity is the right choice for the plaintiff to accept.
Why an annuity?
Annuities are often a component of a structured settlement, negotiated between the parties. They may come up in contexts where the defendant’s financial resources, including insurance, can’t cover a lump sum payment for the entire amount owed to the plaintiff. During negotiations it may become clear that the defendant’s alternatives are to provide an annuity or to declare bankruptcy in hopes of escaping an unmanageable debt. An annuity can be significantly cheaper than a lump sum payment because its cost is based on the future value of current dollars.
Plaintiffs may also prefer annuities to lump sums. A large lump sum payment can trigger significant tax consequences in some circumstances, resulting in a substantial loss of value. A lump sum also poses a practical and behavioral risk for the plaintiff. Someone who receives a check for $2 million may be tempted to spend the money on things other than medical care, even though medical bills are expected to continue to pile up for many years to come. By spreading out payments over a period of time the plaintiff often has an easier time managing the settlement funds. A potential downside of annuities is that if the company that provides the annuity goes out of business, the annuity will vanish.
GGRM is a Las Vegas personal injury law firm
For more than 45 years the law firm of Greenman Goldberg Raby Martinez has represented clients in personal injury cases. Our attorneys are available for free consultations to discuss your injury and your potential settlement options. We can be reached at 702-388-4476, or ask us to call you through our contact page.