| When cases are settled, injured parties usually end up with some cash whether they opt for a structured settlement or a lump sum. In either case, injured parties may be interested
in investing some or all of the cash. The self-investor must remember to deduct the cost of the investment from the interest earned, along with any city, state and federal income taxes. The initial “load” or commission ranges from 0 to 6.5 percent and may be as high as 8.5 percent. Here are some investment options for investing the money, along with their advantages and disadvantages.
Municipal (tax free) Bonds These fixed-rate alternatives to structures require commissions when they are bought or sold. They carry the added risk of being “called” if interest rates fall. Of course, the investor would receive full face value but replacement bonds would come with lower interest rates. These are very risky for those needing long-term income and/or care.
Banks and S&Ls Other fixed-rate choices, such as savings accounts, offer flexibility via easy access. However, this advantage can turn in to a disadvantage since the accessibility breeds temptation to dip in to the funds.
Also, large settlements might not be safe here because they are insured only to $100,000.
In addition, bank interest rates are usually not very high.
Life Insurance Policies This investment simply defers taxability on the interest earned. It is not tax free like structured settlements, and the interest earned is usually low.
Mutual Funds or Stocks If a injured party is interested in investing in stocks, mutual funds are probably the safest investment vehicle for the unsophisticated investor because the fund manager is actually making the investment choices. Interest earned is taxable at federal and state levels and there are commissions and other fees to be paid. Advice from money managers, stock brokers and financial planners has a cost and their choices are not guaranteed to increase stock value. Interest earned depends on the viability of the companies in which the funds are invested.
Treasury Bills, Bonds or Notes These are safe investments but lack flexibility, since they cannot be purchased for the life span of the investor. Also, at term, the broker must reinvest at the existing interest rate. Here, the investor trades control for security.
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