Structured Settlement Vs. Lump Sum Personal Injury Payout

The majority of settlements in personal injury cases are one-time (or "lump sum") payments. But some injury claimants opt to have their compensation paid out in the form of a structured settlement. Let's take a closer look at these two options, and the pros and cons of both.

What Is a Structured Settlement?

A structured settlement is when part or all a personal injury settlement amount is paid to the plaintiff over a period of years. Part of the settlement will generally be paid to the plaintiff (through their lawyer, if they have one) 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.

How Does a Structured Personal Injury Settlement Work?

If you agree on a structured settlement with the person or business responsible for your injuries, that party (or their insurance company) will usually take the part of the settlement that's to be structured and transfer it as an annuity to a company that specializes in handling structured settlements.

You want to make sure that the company charged with paying out the money over the years is very highly-rated, because if the company fails or declares bankruptcy, your structured settlement is gone. This means there's a slight element of risk in a structured settlement.

Can You Negotiate the Terms of a Structured Settlement?

Yes. Almost everything about a structured settlement can be negotiated, including:

• 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 you were seriously injured in a car accident, and your ability to earn a living will be impacted for decades. You reach a $2 million settlement with the at-fault driver's car insurance company.

You tell the insurance company 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's because a structured settlement is what's 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 for advice on how to calculate the value of the structured settlement.

What Are the Advantages of a Structured Settlement?

If you're 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. Some 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 usually isn't 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 a much lower tax obligation.

What Is a "Lump Sum" Personal Injury Settlement?

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. The lump sum settlement is the traditional method for settling a personal injury case. The defendant sends you a check, you cash or deposit the check, and the case is over. It's usually a good idea to take a lump sum settlement for all small settlements and most medium-sized settlements (less than $150,000 or so).

What Are the 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 with the settlement, that's an important reason to get all of the money up front. If you're 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're settling a car accident case for, say, $75,000, and the insurance adjuster is pressuring you to take the money as a structured settlement, it probably makes sense to say no. Tell the adjuster that you want your money as a lump sum settlement, to be paid after you sign the release and other settlement documents.

What's Next?

As your personal injury case approaches resolution through settlement, you and your attorney can discuss the best way to receive the money—all at once or over time. If you've settled your personal injury case without an attorney's help, you might want to talk to a financial adviser to best understand your options and the settlement form that's the best fit.