Should I Take a Full and Final Settlement or Structured Payments?

Colorado workers' compensation lawyer R. Mack Babcock offers expert legal counsel on how injured workers can obtain their benefits

Being injured on the job presents difficulties to those affected—namely that they no longer have the ability to work and bring a paycheck home to their family. Luckily, workers' compensation can offset such injuries.

Like other types of insurance settlements, injured workers generally have the option of receiving a lump sum payout or a structured settlement (typically weekly, monthly or yearly) in cases of serious injury. As we discuss below, each settlement type has its pros and cons.

Full and Final Settlements

An injured worker can try to settle their workers' compensation case on a full and final basis at any point during the pendency of the claim. A full and final settlement is exactly what it sounds like: the injured worker agrees to close their claim permanently and therefore permanently cut off the insurance company's responsibility for any future benefits in exchange for an agreed upon amount of money.

Settlements are voluntary for both sides.

You can only settle a case if the other side is willing to negotiate a settlement. There is no way to force them to do so.  Because a settlement relieves the carrier of any responsibility for additional benefits (or any benefits in the case of a completely denied claim), the amount of any settlement is a reflection of the cost of what benefits an insurance carrier might have to pay in the future if the claim is not settled and the chances that they will have to pay for those benefits.

If a claim is completely denied and you try to settle a case to avoid the risk of losing a hearing and getting nothing, the amount of that settlement would be based on what the entire case could cost the insurance carrier if they lose the hearing. A settlement in that situation could include the cost of wage loss benefits (called temporary disability benefits), medical benefits, and permanent disability benefits (as well as other benefits that sometimes apply in these cases). Often in these cases, the settlement is only based on potential additional permanent disability benefits and medical benefits.

Regardless, full and final workers' comp settlements are almost always paid out in a lump sum (i.e. all at once).

Structured Settlements

People occasionally decide to "structure" settlement payments in serious, catastrophic cases, rather than getting a lump sum payout. A structured settlement (also known as a "structured annuity") is guaranteed payments at a pre-determined interval, either for a certain period of time or for the rest of a person's life.

The structured settlement is not something that is provided by the insurance carrier involved in the claim. The insurance carrier involved in the claim still pays the entire settlement upfront, but then the structured settlement is purchased with the settlement monies paid by the workers' compensation carrier in the claim from another financial company.

Structured Settlements

In serious cases, a claimant may choose structured settlements for 2 reasons:

  1. Structured settlements are usually guaranteed for life. Thus, in serious cases it can provide a guaranteed source of income for the rest of the person's life to pay for medical treatment and living expenses no matter how long they live. Structured settlements avoid the risk of the injured worker "blowing" the money all at once.
  2. Structured settlements have huge tax benefits. Settlements paid in a workers' compensation case are not taxed. If, however, you take a large settlement in a lump sum and invest the money on your own, all of the earnings on the money are taxed. If you do a structured settlement, however, then the financial company you purchased the structured settlement from invests the money and provides a return on your money. In short, you get a better return on the money because of the tax-free benefit.

However, there are some drawbacks to structured settlements, too. The main disadvantage is that scheduled payments are mostly locked in once you agree to the structured settlement.  In other words, you can't change your mind in the future and get a lump sum payout without significant penalties.

Is a workers' comp settlement taxable?

Generally speaking, settlements paid in workers' compensation cases are not taxable income. You don't have to pay federal or state taxes on a workers' comp settlement because these benefits are not considered “earned income” or “taxable income” under tax laws. This applies to both structured weekly wage loss and lump sum workers' comp settlements.

One of the reasons for this is because any benefits you receive for lost wages are at a reduced rate from your normal pay since there is a state-set maximum rate. Therefore, lawmakers and the courts have ruled that it would be grossly unfair and unjust to require injured workers to pay taxes on these benefits.

Any workers' comp death benefits paid to survivors of workers killed on the job are also tax exempt.

One exception is if you return to work in a modified role during your recovery. In this case, any earnings from your job will be taxable since they are considered “earnings” from working. Any additional workers' comp wage loss benefits you're still receiving will not be taxed though.

Seek Legal Counsel Immediately

Regardless of which option works best for your situation, being injured in the course of performing your job entitles you to workers' compensation benefits.  If you need guidance on the best way to receive your injury benefits, we strongly advise consulting a knowledgeable workers' compensation lawyer as soon as possible.

If you were injured in Colorado, the work injury legal team at The Babcock Law Firm wants to talk to you. We can discuss your case and come up with a solution that works best for you and your family.

Continue reading these related articles for more information...

While The Babcock Law Firm tirelessly works to obtain successful outcomes for its clients, prior positive outcomes are no guarantee of future success. Indicating prior positive results is in no way intended to guarantee future results.

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