Why winning that giant settlement from the insurance company might hurt you

Winning a big settlement on your insurance claim might bring on problems you would never imagine. Studies show about 70% of those experiencing sudden wealth actually end up broke within seven years, according to the National Endowment for Financial Education.

Those who walk away with a big check from the insurance company are suddenly in the same boat as professional athletes. So, if this is what may be happening for you, take note of these statistics:

  • People who win the lottery are twice as likely to file for bankruptcy every year than the general population (winning the lottery doubles your chance of bankruptcy).
  • 78% of NFL players are either bankrupt or under financial stress within 2 years of retirement,
  • 60% of NBA players go bankrupt within 5 years after leaving their sport,
  • Mike Tyson earned $400 million over his boxing career, but declared bankruptcy in 2003.

(March, 2009, Sports Illustrated, “How (and Why) Athletes Go Broke”)

Of course, many of you will say that would never happen to you. No one wants to or expects to outlive their money, but the odds are against you if you come into a lot of it all of a sudden. Here are some things to think about while you plan for your insurance claim to be settled:

#1: Pay Off All Debts

First, eliminate all of your debts, including mortgages and car loans. Having zero debt protects you from the peaks and valleys of your investments.

#2: Create a Budget

You've got to keep your spending under control, and pay attention to what you spend. It's also wise to keep your newfound wealth on the down-low, and resist making promises to family and friends you could bail out of their own spending woes.

#3: Hire a Trusted Team of Financial Advisors

There are certified financial planners who specialize in helping insurance claim recipients. There's a reason for that! Hire one of them to help you make a plan to not just keep your money intact, but increase it. This is especially important to think about if your car accident injuries will prevent you from working at all, or will change your job prospects in other ways. Let your money work for you through the power of compounding - invest in small ways and let them grow larger over time. For example, Magic Johnson buit a net worth of over $500 million by buying some restaurants and small businesses.

#4: Put the $ in a Structured Settlement Preservation Trust

Think of a trust as a job you can't get fired from. A Structured Settlement Preservation Trust will pay you monthly while keeping the principal intact. 

Also, choose to take the money from your settlements in annual payments instead of a lump sum. Though the interest rate on an annuity is very low, the idea is that it preserves your capital. A few mistakes won't make all your money dry up, and you get a tax benefit from taking the money over time. 

#5: Stay Married (or Get a Prenuptial Agreement)

That 50% rule would have a very different number associated with it after a big settlement compared to before. 

#6: Become a Student of the Ultra-Rich

Take heed from a modern classic, Thomas Stanley, Ph.D.’s book, “The Millionaire Next Door”. Most millionnaires don't inherit their money and not everyone will be able to invent Google. The average millionaire is frugal, saves well, invests conservatively and grows wealth over time.

 

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