Settlement Payments Require Careful Planning.

• Position: Brief Article

People who successfully bring suit in a personal injury, wrongful death, medical malpractice, or other type of lawsuit, or who settle a worker's compensation claim, often must make a difficult financial decision. Should they take the money as a lump sum or spread it out in a series of payments over a certain period of time, called a structured settlement? There are advantages and disadvantages to each approach, so one should weigh each option carefully before choosing, the Institute of Certified Financial Planners, Denver, Colo., cautions.

The majority of people who settle a civil lawsuit or worker's compensation claim take a single cash payment, which may be the best choice in some cases. The victims may have accumulated significant medical debts, for example, that need to be paid off as soon as possible. They potentially can invest the money and earn more with it than if they had taken it in a series of structured payments. Moreover, if the recipient dies, heirs have access to the remaining lump sum, while structured settlement payments often stop at death.

There are risks to the lump-sum approach, though. Research has shown that most people spend a lump sum in a relatively short time. One study found that 25-30% of all accident victims spend their settlement within two months, and 90% do so within five years. Quickly running through a lump sum can be devastating, particularly if one will need the money for years or even a lifetime to pay for medical or living expenses. There also is the risk that the lump sum will be invested unwisely. Relatives or unscrupulous investment sales people may try to prey on a victim's "wealth." Whatever the reason, once the money is gone, it's gone for good.

Structured settlements provide an agreed-upon series...