Pitfalls of Structured Settlements
Structured settlements come with several risks that should be considered including:
Limited Flexibility
Structured settlements provide a fixed schedule of payments, often over an extended period. Once the settlement terms are established, it can be challenging to modify or access funds beyond the agreed-upon structure. This lack of flexibility may limit the recipient's ability to adapt to changing financial circumstances or unexpected expenses. In some cases, this lack of flexibility may lead victims to sell their structured settlement to factoring companies like Peachtree or JG Wentworth for a fraction of its actual value.
Reduced Control over Funds
When accepting a structured settlement, individuals typically relinquish control over the invested funds. The settlement is managed by an assigned insurance company or annuity provider, who becomes responsible for making the scheduled payments. This lack of control may be undesirable for some individuals who prefer to have more control in managing their finances.
Inflation Risk
Over time, the value of money decreases due to inflation. Structured settlements often fail to keep pace with inflation, as the payment amounts remain fixed throughout the duration of the settlement. This means that the purchasing power of the payments may diminish over time, potentially impacting the recipient's ability to meet increasing living costs. For instance, if your structured settlement was designed to cover the cost of skilled nursing care and those costs rise over time, your monthly structured settlement check may no longer be sufficient.
Unforeseen Changes in Circumstances
Life is unpredictable, and structured settlements may not adequately accommodate unexpected changes in the recipient's circumstances. For example, the scheduled payments may not be sufficient to cover medical emergencies, home repairs, or other urgent financial needs. In such situations, accessing additional funds from the structured settlement can be impossible. Again, circumstances force victims to sell their structured settlement to factoring companies like Peachtree or JG Wentworth for a fraction of its actual value.
Counterparty Risk
Structured settlements rely on the financial stability and longevity of the insurance company or annuity provider responsible for making the payments. If the responsible party encounters financial difficulties, declares bankruptcy, or fails to fulfill its obligations, the recipient may face significant challenges in receiving the agreed-upon payments.
Lost Investment Opportunities
By opting for a structured settlement, individuals forgo the opportunity to invest the lump sum of money received in a potentially more profitable manner. If the recipient could have invested the funds in higher-yielding investments, they may miss out on potential investment returns.
Emotional and Psychological Impact
While not a financial pitfall, it is worth considering the emotional and psychological impact of receiving a structured settlement. Some individuals may feel frustrated or restricted by the ongoing payment schedule, as it serves as a constant reminder of the incident that led to the settlement. This emotional burden can affect an individual's overall well-being.