Personal Injury Structured Settlements: Pros and Cons

Not every personal injury lawsuit will make it to trial. Many personal injury cases reach a settlement agreement earlier in the litigation process. 

A settlement agreement contains more than a figure for the total amount of compensation. It also specifies how and when the other party will provide the compensation.

Before accepting any settlement agreement, discuss all options with a personal injury attorney. They can help you explore how structured settlements work. This article will cover the basics, including some pros and cons of structured settlements for you to consider.

Settlement Options in a Personal Injury Case

A negotiated settlement requires the plaintiff to drop any further legal action. This is in exchange for receiving a payment from the defendant or the defendant’s insurance company. Settlement payments are usually made as a lump sum (all at once) or on a structured schedule.

What Is a Lump-Sum Settlement?

In a lump-sum settlement, the person responsible for your injury (or more likely their insurer) pays a large amount of money at one time. Lump-sum payments may be better for cases involving minors.

What Is a Structured Settlement?

A structured settlement offers the injury victim regular payments over several years. Or, if applicable, for the rest of the plaintiff’s life. A structured settlement payout may help parties reach an agreement if they are far apart in their settlement negotiations.

Structured settlements can provide long-term regular payments in personal injury, workers’ compensation, and medical malpractice cases. They are especially helpful when the plaintiff suffers a catastrophic physical injury. They may be better suited for those who will need long-term medical expenses.

Blending Lump-Sum and Structured Settlements

You may combine a lump-sum payment with a structured settlement payment to meet immediate expenses. These can include medical bills, debt repayment, and rehabilitation costs.

For example, you may have a $70,000 product liability settlement to be paid over a five-year period. The terms of the settlement say that you will receive a one-time lump-sum payment of $20,000 to cover your immediate costs. Afterward, you can receive the remaining $50,000 through structured payments in monthly installments (about $833 per month for five years). Note that this example doesn’t include taxes, fees, and other factors.

What Is an Annuity for a Structured Settlement?

An annuity is a type of insurance contract that provides for scheduled payments. They are often sold as insurance investment products. In the context of a personal injury settlement, a defendant’s insurer funds an annuity policy for the plaintiff. Annuity contracts cover a variety of expected expenses.

An annuity produces a continuous income stream over the structured settlement term. Fixed-term annuities last for a set period before the payments end.

With a lifetime annuity, there’s no risk of outliving the money. Future payments can last for the claimant‘s lifetime. This structure can be particularly helpful in cases of permanent disability, though a lump-sum disability buyout may be suitable in some cases.

In the past, some life insurance companies didn’t want to disclose how much they would have to pay to buy an annuity covering the settlement amount. A structured settlement usually costs insurance companies less than a lump-sum settlement. This info is necessary for the plaintiff’s attorney to make a complete assessment of a settlement offer. Some states, such as New York and Florida, have a disclosure law known as the “Structured Settlement Protection Act” (SSPA). These laws force insurers to reveal their costs in such cases.

Could I Lose My Settlement if the Insurer Becomes Insolvent?

When considering a long-term structured settlement, you might wonder what happens if the insurance company fails. Most states have a safety net for insurance companies that become insolvent. This guarantees coverage for an insurer’s obligations. Furthermore, federal law doesn’t allow an insurer to declare bankruptcy.

In most states, insurance laws protect annuities. Insurance companies and policy claims will continue to be covered and paid by the home state’s guaranty association. This protection is subject to state limits. Learn more about the key provisions in your state if you are unsure about the specifics.

Despite this safety net, there’s always a risk that the insurance company responsible for the annuity could become insolvent. This could impact the payment of future benefits. Your lawyer can advise you on the potential risks associated with a structured settlement for your claim.

Pros of a Structured Settlement

Here are a few benefits of a structured settlement:

• Structured settlements offer plaintiffs the financial security of payments over a fixed period. This option also allows for long-term investing.
• Parties may tailor annuities to cover a plaintiff’s future demands or contingencies.
• Parties can dedicate funds from a structured settlement to cover advances in medicine. If medical science develops a miracle cure, the plaintiff can try it.
• Structured settlement annuities are not subject to market volatility or investment risks. Irrespective of the economic climate, the recipient will continue to receive the agreed-upon amount.
• A series of payments may be easier to manage than a large sum of money, which can sometimes lead to irresponsible financial decisions. Injured victims and their family members can focus on using it for its intended purposes, such as ongoing medical care.

These benefits show how structured settlements can accommodate individual needs. For example, an injured party may have high medical expenses, but they expect these costs to decrease over time. They can structure the settlement to provide larger payments upfront.

Cons of a Structured Settlement

Below are a few potential disadvantages of structured settlements:

• Some of the settlement money may still be taxable.
• The full amount of money is not immediately accessible to the injured person.
• A plaintiff may fear that a recession or unknown economic changes could make the annuity payments too small.
• Once the parties agree on a structured settlement, changing the terms is difficult. This could be a drawback if the claimant‘s financial circumstances change.
• Unlike investments, structured settlements offer no chance for capital growth. The payment schedule and amounts do not change over time.
• Some structured settlements come with high fees that can reduce the settlement amount. These include administrative fees, management fees, and attorney fees.

You may also want to consider the concept of the time value of money. It indicates that a dollar today is worth more than a dollar in the future. This is because money can earn interest over time. In a structured settlement, the claimant might end up with less money than if they took a lump sum and invested it. Structured settlements also do not account for inflation. The buying power of the monthly periodic payments could decrease over time.

Taxes on Structured Settlement Payouts

A structured settlement may provide a plaintiff with an income tax benefit. Personal injury settlements are “tax-free payments” under the U.S. Internal Revenue Code.

Yet, some exceptions apply. Certain parts of settlement money are taxable, regardless of whether it is received as a lump-sum payout or structured arrangement. These parts include punitive damages, some attorneys’ fees, and purely emotional damages.

Personal injury and car accident settlements can still be subject to taxes. Speak to a qualified attorney or tax specialist to learn more about paying taxes on your settlement proceeds. You should also be aware of other financial obligations like health care and insurance subrogation.

Learn More About Structured Settlements by Talking to an Injury Lawyer

Taking a settlement may be a faster alternative to a trial for a personal injury claim. Contact a personal injury lawyer if you or a loved one suffered an injury or wrongful death. You can discuss whether a structured settlement would be in your best interests.