What is a structured settlement? Learn more about this long-term method of awarding damages to a plaintiff in a personal injury case.

What is a structured settlement? Learn more about this long-term method of awarding damages to a plaintiff in a personal injury case.

What Is a Structured Settlement?

You may have heard the term “structured settlement” and wondered about what it is and how it works. Basically, a structured settlement is a payment that goes to the successful party in a personal injury lawsuit, but rather than paying out this compensation in a lump sum, the defendant agrees to purchase an annuity from a life insurance company for the plaintiff. This annuity pays the plaintiff a regular (often monthly), tax-free sum for a specified period or for the rest of their lives. The terms of this kind of settlement are negotiated by the two parties. Usually the plaintiff will receive part of the money awarded as a lump sum to be used to compensate for medical expenses, lost wages, and special equipment, and will receive the remainder of the money as regular structured settlement payments. In Canada, about half of significant personal injury cases involve a structured settlement.


Advantages of a Structured Settlement

There are many cases in which a structured settlement can be the best choice.

  • The plaintiff has suffered a catastrophic injury. A catastrophic injury includes such injuries as a traumatic brain injury, the loss of a limb, paraplegia, quadriplegia, or a spinal cord injury. These are severe injuries that will impact a person for the rest of their lives, and which can mean that the person may have difficulty working, or caring for themselves in the future. In these cases, it makes sense to ensure that the victim will have regular payments that will help them afford to live more comfortably.


  • Wrongful death cases where the victim has died but left young dependants. In the case where a parent dies leaving young children behind, it’s good to have a settlement that will support them until they are independent. It can be equivalent to having a second income for the household.


  • When the plaintiff is young. It makes sense, if the injured party is young, to spread the payments out. This can help the victim to manage the money, and to conserve some of the settlement for the future.


  • Payments can be tailored to circumstances. A structured settlement can be quite flexible. For example, you can opt for a structured settlement that lasts for the remainder of the plaintiff’s lifetime, or you can limit it to a certain number of years. You can designate some of the compensation to be paid in a lump sum and the remainder to be put into an annuity.


  • When a plaintiff has an addiction or other issues. Sometimes an accident victim has issues that mean they are not as responsible as they should be. In those cases, paying out a lump sum may actually be detrimental.


  • The settlement payments are creditor-proof. The American Life Insurance Association researched what happened to people who received a large sum of money (including settlements, lottery wins, awards, and inheritances.) They found that within five years, 90% of these windfall recipients had spent all of the funds. If the plaintiff is not good at managing money or may be in danger of spending the money irresponsibly, a structured settlement might be the best option. It cannot be garnished like wages can, and no one except the plaintiff is entitled to this payment. It ensures a measure of financial stability.


  • Taxation. If a plaintiff takes a lump sum payment and invests it, earnings on that investment are taxable. Structured settlement payments are tax-free.


  • Safe. Because these payments are guaranteed by a life insurance company, Assuris (a government-approved non-profit organization charged with ensuring that payments get to you), and a casualty company in charge of the annuity, you can be reasonably sure that the payments will continue to arrive.


Disadvantages of Structured Settlements

  • No alterations to the settlement terms. Although there is a lot of flexibility to tailor the settlement to individual needs when it’s is being created, there is no ability to change the terms of the agreement after it has been made. So, for example, if the plaintiff learns of an expensive new medical procedure that might be able to help them, they cannot ask to have extra funds from the annuity made available to them.


  • Early death. If a claimant lives an average lifespan, a lifetime structured settlement will usually pay them much more than a lump sum that has been invested will. However, if a claimant dies sooner than expected, the payments end and the claimant’s family will not inherit.


  • The economy. If the economy experiences drastic changes such as inflation or recession, the settlement payments may become too meagre to live on.


  • Constant reminder. Some people don’t like the monthly reminder of their accident or injury, and just want to have everything settled as soon as possible.


If you have been injured in an accident, a good personal injury lawyer can help you to navigate the legal processes, and, in the case of a settlement, can advise you about what is right for you: a lump sum cash settlement, or a structured settlement. Contact a personal law firm today and find out more.

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