The Settlement Alliance

What is a Lump Sum Settlement?

What is a Lump Sum Settlement?

Mar 9, 2017

If you are involved in a settlement—as the result of a personal injury case, for example—there are several different options for how you can accept the proceeds. One of those options is a lump sum. Before you make a decision, though, be sure that you are aware of the potential consequences of accepting a lump sum settlement.

What Does “Lump Sum” Mean?

Accepting your settlement proceeds as a lump sum simply means that you are accepting all of the money in one cash payment. Once the settlement amount is agreed upon by both parties, the defendant (or insurance company) would cut you a check for your portion of the settlement, minus your attorney’s fees.

While accepting a lump sum may make sense for small cases, there are a number of considerations that come into play:

  • Taxes: Personal injury settlement proceeds are not taxable. However, if you invest the proceeds in a traditional investment vehicle (e.g. stocks, mutual funds, etc.), any interest growth on the investment is taxable.
  • Government benefit eligibility: If you receive needs-based government benefits such as Medicaid or SSI, accepting a lump sum will likely make your asset level too high to qualify for your benefits. The disruption could be temporary or even permanent, depending on the size of your settlement.
  • Preservation of settlement funds: It can be difficult to make well-informed, clear-minded financial decisions immediately following a settlement. “Friends” and family have their opinions, financial advisors want to steer you in certain directions, and figuring out how to best preserve the money may be the last thing on your mind.

Depending on the type of case, there are other options that may be more suitable for meeting your short- and long-term needs. A structured settlement is one of the most common alternatives to a lump sum for personal injury, wrongful death, and workers’ compensation settlements.

Structured Settlements

A structured settlement is a financial arrangement in which the defendant (or insurance company) “assigns” a predetermined portion of the settlement proceeds (or all of the proceeds) to an assignment company, which then purchases a structured settlement annuity from a structured settlement carrier. The carrier then makes periodic payments to the claimant based on a schedule agreed upon by the claimant.

A structured settlement funded by proceeds from an injury case is income tax-free. Unlike a lump sum, though, any interest growth on the structured settlement is also tax-free. Depending on how the structured settlement is handled and what other settlement tools (e.g. special needs trust) it is used in combination with, it may also be able to help prevent you from losing government benefit eligibility. It can also provide peace of mind that the settlement proceeds will be there when you need them, whether you decide to take the payments, monthly, bi-annually, annually, or in a few future lump sums.

Contact Our Settlement Planning Team

The Settlement Alliance is your resource for structured settlements and other settlement planning options. Contact us today at or 800-464-2500 to learn more.

We are proud to partner with the highest rated structured settlement providers in the industry:

  • American general Life Companies
  • Berkshire Hathaway Structured Settlements
  • MetLife
  • Mutual of Omaha
  • New York Life
  • Pacific Life
  • Prudential