Most have zero experience managing large sums of money
by Alanna RitchieMs. Ritchie has spent years studying, writing and learning to love the intricacies of the English language. Today, she works as a content writer for Annuity.org, where her primary focus is personal wealth management.
When your clients receive a windfall, they are suddenly faced with a heavy financial responsibility and multiple options for handling that money. Some clients have zero experience managing large sums, and spending now may lead to regrets or disappointing investments down the road.
Providing advice on how to best receive those funds — either through a structured settlement or lump sum — will require looking at factors such as your client’s needs, financial portfolio and goals.
Your client’s needs will suit the reason they are receiving a large sum of money: Personal injury lawsuit, a wrongful death claim, workers’ compensation case or other situations. For cases where a serious injury is involved, medical needs will play a large role in planning for the future.
Once you have a clear picture of your client’s requirements and finances, you can begin guiding them through the process of how they’ll receive their money by evaluating the advantages of both options.
Evaluating the Situation
One key factor in counseling your client will be the amount of money in question. Experts suggest that if your client will receive a small or medium amount of winnings or a settlement — less than $150,000 — then a lump-sum payment is typically a better choice. For larger amounts, a structured settlement may be the preferred option.
Two other key factors that can determine the best course of action for your client are the evaluating the conditions of the case and the client’s physical and financial needs.
Are Certain Conditions Met?
The first consideration is very important for personal injury lawsuits, wrongful death claims or workers’ compensation cases. Certain conditions in these different types of cases make them more suitable for structured settlements.
Cases where there is 40 to 100 percent disability, especially where future monthly medical expenses are likely to cost more than $500, are well-suited for structured settlements. Because of the high cost of medical care and the likelihood of the continued need to maintain these costs, a guaranteed monthly income can ensure health needs are met.
For cases involving sickness or injuries, a structured settlement can be used to fund a Medicare Set-Aside. This is an account where a current or future Medicare recipient sets aside money for injury related care, and once the money in this account is spent, Medicare takes assumes responsibility for future injury-related expenses. By structuring payments for a Medicare
Set-Aside, your client can save money
Wrongful death claims are another area where structured settlements offer benefits. Settlements may be set so that surviving family members who are minors will receive money after the age of 18, which will correspond with life events over time, beginning with college tuition, then purchasing a car, and later on assisting with expenses when starting a family, buying a home or starting a business. These come with a guaranteed interest rate and no maintenance or management fees. Additionally, surviving spouses may be eligible for lifetime benefits.
What Are Your Client’s Needs?
Your next step will be taking a closer look at your client’s health concerns. For structured settlements, the length and amount of payments are partially contingent on the current health and life expectancy of the annuitant. Make sure your client’s short- and long-term health needs are met, including rehabilitation, hospital bills, doctor’s visits, surgeries, replacement medical equipment, medication and other costs.
If there is a timeline for when a client will need to schedule events, like surgery or replacing equipment, a structured settlement can be designed to provide payments around those periods. Alternatively, a lump sum may be appropriate if there are pressing health needs that must be paid for immediately.
The other major need you will want to address for your client is their financial portfolio. Examine where they currently stand, including debts owed. If they have debt, a structured settlement can provide protection from creditors. However, if they want to pay off old debts immediately, they may take a lump sum and save themselves the additional interest.
Look at a client’s future earning ability, other assets and investment goals. Clients may choose a lump sum if they plan to invest the money they receive. For clients who have already spent time on their portfolio and would like to ensure that they will have guaranteed income, a structured annuity with part of their settlement money can allow them to diversify their investments.
Advantages of a Lump Sum
The major advantage of a lump-sum payment is the immediate availability of cash.
For clients eager to use other investment vehicles with higher interest-earning potential, a lump sum is a better choice than a structured settlement. However, earnings from these investments will be taxed. The money from the lump sum itself — before it is invested — will not be taxed, as long as it is from a case that involves physical injury, physical sickness or wrongful death damages.
Some clients have pressing financial needs that cannot be met with payments over time. If there is credit card debt or medical bills already hanging over your client, a lump sum can remedy those immediately.
Another benefit of a lump sum is that there are no future payments that might interfere with Social Security income or Medicare eligibility. For those who choose structured settlements, there is a risk that future settlement payments may either reduce or eliminate public assistance benefits.
A client may change their mind and choose to invest in an annuity later on in life. However, if they take a lump sum now (if it is part of a qualified settlement) and decide to purchase their own annuity later, they will not have the same level of tax breaks.
Advantages of a Structured Settlement
Instead of taking money all at once and facing the risk of spending too quickly or losing value in investments, your client may benefit from utilizing a structured settlement which provides security, flexibility and tax advantages.
By choosing a highly-rated and reliable insurance company, your client gains access to guaranteed income. While the interest rates on most structured settlements are low, your client can count on a stable return, sacrificing investment potential for reliability and eliminating market risk. Additionally, the interest will still compound over time.
With multiple options for the timeline on structuring settlements, this financial asset offers flexibility. Large payments can be factored around major life events such as buying a car or house, and regular payments can be set to afford on-going medical care. Clients can choose payments in annual installments, periodic lump sums or monthly payments. The same payments can be structured so they increase periodically to account for inflation.
When your clients receive payments from structured settlements, these will be free of state and federal income tax. The interest earnings in these settlements will also be tax-free. Looking at the tax benefits available to your client can allow you to assist them in choosing the best route with their money.
For those who have not handled large sums of money in the past, this option can preserve wealth so it lasts throughout time and meets many needs.
Figuring out what makes the most sense for your client will require at looking at each unique situation. Not everyone will benefit from a structured settlement, and not everyone will find that a lump sum is the ideal option. However, for all cases there are primary factors to consider and advantages that will stand out.
By lending your client your experience with handling finances, you can guide them toward a beneficial choice.