Should You Accept a Structured Settlement?

A lump sum payment is generally preferable to a structured settlement in an injury case, but there are some exceptions.

The majority of settlements in personal injury cases are lump sum payments. A lump sum payment means that the defendant (or the defendant’s insurance company) makes one payment to you, and that payment settles the case. However, instead of a lump sum payment, some plaintiffs opt to have their compensation paid out in a structured settlement. A structured settlement is when part or all of the settlement amount is paid to the plaintiff over a period of years. Part of the settlement will generally be paid to the plaintiff and his/her lawyer immediately after the settlement as a lump sum, and the rest will be structured over a period of years. Some structured settlements even involve lifetime payments. Read on to learn more.

How Does a Structured Settlement Work?

If you and the defendant agree on a structured settlement, the defendant (or the defendant’s insurance company) will transfer the part of the settlement that is to be structured to a different insurer, often a life insurance company that specializes in handling structured settlements. You want to make sure that the company that pays the money out over the years is very highly rated, because, if the company fails or declares bankruptcy, your structured settlement is gone. This means that there is a slight element of risk in a structured settlement.

Almost everything about a structured settlement can be negotiated, including terms such as:

  • the length of the structure
  • how often you want to receive money (once a year, twice a year, monthly, etc.)
  • how much money you want to receive in each payment
  • whether you want a lump sum payment at the end, and
  • whether you want the payments to end if you die before the end of the structure or whether you want the payments to continue to your heirs.

Calculating the Amount of a Structured Settlement

Let’s say that you want to receive $100,000 per year for 20 years, and that you want the payments to continue to your heirs if you die before the 20 years are up. Although you (or your heirs) will be receiving $2,000,000 over the 20 years, the defendant will be paying much less than $2,000,000 to fund the settlement.

That is because a structured settlement is what is known as a "future income stream." A future income stream generally has to be calculated in terms of its present value. Present value is a financial concept that involves determining the value of a future income stream as if it were all in a bank account today.

In other words, how much money does the insurer need in a bank account, earning interest, today in order to pay you and/or your heirs $100,000 each year for the next 20 years? The quick answer is that the insurer will need substantially less than $2,000,000 in a bank account today in order to pay your structured settlement. But this is a complex financial calculation, and your lawyer will customarily hire an economist to advise him/her on how to calculate the value of the structured settlement.

Advantages of a Structured Settlement

The lump sum settlement is the traditional method for settling a case. The defendant sends you a check, you cash the check, and the case is over. You should take a lump sum settlement for all small settlements and most medium-sized settlements (less than $150,000 or so).

But if you are settling a larger case, there are two good reasons for doing a structured settlement.

First, the structure guarantees that you won’t spend the money too fast. Sadly, many personal injury plaintiffs who receive large windfalls blow through the money in an astoundingly short time, and then, maybe two or three years later, have nothing left.

Second, the structured settlement saves you money on your taxes. While the money that you receive in a personal injury settlement is usually not taxable, you do have to pay taxes on the interest and dividends that you receive on the settlement money after you invest it. That can be a large tax payment every year. With a structured settlement, you have far less money sitting in the bank, and thus a much lower tax obligation.

Advantages of a Lump Sum Settlement

The main advantage of a lump sum settlement is that you get the money now. If you need to pay off bills from the settlement, that is an important reason to get all of the money up front. If you are planning to start a business or buy a house or car with the settlement proceeds, then you need the money now. And if the settlement simply isn’t that large, you get no significant advantage from a structured settlement.

So, if you are settling your own car accident case for, say, $75,000, and the insurance adjuster is pressuring you to take your settlement as a structured settlement, tell him/her no. Tell the adjuster that you want your money as a lump sum settlement, to be paid after signing the release and other settlement documents.

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