Demystifying Personal Injury Settlements: A Guide to Navigating Your Claim

2/20/2025 - By Chris Stennett, CFP

Every time you get behind the wheel, you accept the risk of an accident—and in Florida, where I live, those risks are higher than you might think. The odds of being involved in a crash in the Sunshine State range from 2.5% to 5% annually, depending on whether another driver is involved. Even more concerning, nearly 40% of accidents here result in injuries.

A little over a year ago I was involved in a vehicle accident with injuries. I learned that when another party is at least partially responsible for an accident, the victim(s) may be entitled to compensation. But while a settlement might offer financial relief, navigating the process can be daunting without the right knowledge and preparation.

This article will guide you through the essential considerations for managing a personal injury settlement, helping you avoid pitfalls and secure a stable financial future.

1. Addressing Underlying Challenges Before the Settlement

Vehicle accidents can be life-altering, and the process of physical and emotional recovery is often accompanied by financial strain. Over 95% of personal injury cases are resolved through settlements rather than going to court. While settlements are intended to provide relief, they typically take months or even years to materialize after the initial accident. Focus on improving your physical and mental health in the initial period after the accident. Should financial challenges arise, work with your attorney or financial advisor to discuss short-term funding solutions.

Also understand that the financial problems you had before the accident will still be there after the settlement, but they will be amplified. If you struggled with living paycheck to paycheck or made poor investment choices, you likley need help in setting spending guardrails, so you don’t continually overspend. Whatever the financial skeleton hidden in your close, work with an advisor to start building the right habits today, before the settlement is received because once the settlement is received, it will open doors to both opportunities and risks (“Mo Money, Mo Problems” – Jay Z).

2. Define Your Financial Goals

Receiving a settlement can be life-changing, but it also requires careful management. In Ernest Hemingway’s 1926 novel “The Sun Also Rises” Mike Campbell responds to the question “How did you go bankrupt?” with a very memorable phase. “Two ways. Gradually, then suddenly.” To avoid this outcome, first take the time to define your financial goals. What do you want to achieve immediately, and what are your aspirations for the future? If you’re not sure where to start, ask your attorney for a referral to a Certified Financial Planner™ (CFP®). They can help translate your goals into an actionable plan, so that your settlement supports both your current needs and future ambitions. If they are unable to provide you with a referral, find our contact details below as we work with clients across the world.

3. Plan for Taxes

One of the first considerations when receiving a settlement is understanding its tax implications. Fortunately, most parts of a personal injury settlements is not taxable under federal or Florida state law. However, there are exceptions. Work with an attorney specializing in personal injury settlements and consult a licensed tax advisor to ensure compliance and maximize the benefits of your settlement.

4. Understand Release Agreements

As part of the settlement process, you will be asked to sign a release agreement. This legally binding document resolves the dispute and prevents you from pursuing further legal action related to the same incident. Carefully read the terms and conditions, ideally with the assistance of an attorney, to ensure you understand your rights and obligations.

5. Protect Your Settlement Proceeds

A sudden influx of money can attract a lot of attention. It’s not uncommon for friends or family members to approach you for financial help. While their stories might be compelling, understand that protecting your settlement is of paramount importance. So how do you do that? Start with these 3 Steps:

1. Maintain Privacy: Do you remember the movie Fight Club? “The first rule of settlements is: You don’t talk about settlements.” Keep the details of the settlement private to avoid unwanted attention.

2. Build a Strong Financial Foundation: Ensure you have adequate emergency savings. 3 – 6 months of livings expenses held in a savings account, separate from your primary checking. Also, have appropriate insurance coverage and an updated estate plan.

3. Combat Inflation: Over time, inflation can erode the purchasing power of your settlement (remember 2022?!). Investing in a well-diversified portfolio of growth-oriented assets like stocks and bonds can help preserve and increase your wealth while offsetting the long-term risk of inflation.

6. Conclusion

If you are expecting to receive a personal injury settlement, the most important step you can take today is to plan ahead. While settlements are generally not taxable, they still come with potential pitfalls, if not carefully managed. A settlement represents both an opportunity and a risk: it can secure your financial future but if mismanaged, it can vanish surprising quickly.

To minimize risks and maximize opportunities, enlist the help of the following qualified professionals who are legally obligated to act in your best interest. 1. Your personal injury attorney - they can guide you through the legal aspects. 2. a Certified Public Accountant - they clarify tax considerations. 3. Certified Financial Planner™ - they can help you think though your short-term and long-term lifestyle goals and help create a comprehensive plan tailored to your desires.

By approaching your settlement with a strategic mindset, you can ensure it serves as a foundation for long-term stability and success. As always, contact us if you have any questions or would like to schedule an initial consultation.

About the Author | Chris Stennett, CFP®

Chris is a senior financial advisor and Certified Financial Planner® practitioner for Saltmarsh Financial Advisors, LLC, an affiliate of Saltmarsh, Cleaveland & Gund. He serves individuals and organizations as a comprehensive financial planner and coordinator of investment activities. His areas of expertise include investment management, income planning, tax and estate planning, and risk management. Chris has over 15 years of experience as a wealth manager working with high-net-worth families and privately held business owners across the U.S.