Understanding Structured Settlements

During most lawsuits, the parties involved have many discussions about what it would take to settle the case. Personal injury lawsuits are generally designed to compensate injured victims for the expenses, costs, and suffering related to their injuries caused by the defendants’ negligence. In cases with less severe injuries, the parties can often agree on a reasonable dollar amount to settle the case. For cases involving more serious, long-lasting injuries, settlement negotiations can be much more difficult. Structured settlements can help resolve issues that can arise in these types of more complex personal injury cases.

What Is a Structured Settlement?

In general, compensation is paid to a plaintiff in two ways: 1) as one or more lump-sum payments of cash, or 2) as a structured settlement. A structured settlement provides regular, scheduled payments to the plaintiff over multiple years. However, the defendant doesn’t make these payments directly to the plaintiff. Instead, they use a third-party insurance agent called a structured settlement broker. The broker arranges for the defendant to buy an annuity (a long-term investment vehicle with regular payouts) and assign the payment rights directly to the plaintiff.

If the parties decide to use a structured settlement as part or all of a plaintiff’s compensation, they must agree on what amounts will be paid, how often, and for how many years. They also must decide when the payments will start (immediately or at a future date) and whether they will survive the plaintiff’s death (and transfer to a beneficiary).

For example, the parties may agree that a 35-year-old woman injured by medical malpractice will receive $100,000 each year for the rest of her life. Or the agreement may specify that the payments will start when she turns 55 years old (providing a guaranteed stream of income for retirement).

Why Use a Structured Settlement?

Structured settlements can help resolve litigation faster. This is because the amount the defendant pays costs less money now (in present-day dollars) than the plaintiff will receive in future payments.

For example, consider the situation where a defendant is unwilling to raise their settlement offer from $1 million to $5 million. As a result, the parties seem to be at an impasse. A structured settlement may enable the defendant to purchase an annuity for closer to its $1 million offer that will be worth closer to $5 million to the plaintiff over the course of the plaintiff’s life. 

Spacing out the payments of a settlement can help a plaintiff in other ways, too. Although settlement compensation is not usually taxable, many conscientious plaintiffs invest their proceeds. This protects the principal from irresponsible spending or loss and allows them to earn interest on the funds for guaranteed future income. However, the interest and capital gains on most investment vehicles are taxable! Rather than invest tax-free settlement proceeds into a taxable investment vehicle, structured settlements provide simple, guaranteed future tax-free payments.

What Are the Drawbacks of Using a Structured Settlement?

Settling a lawsuit using a structured settlement ensures that a plaintiff will have a steady stream of future non-taxable income to pay medical bills, living expenses, and other needs. However, this stability and security also prevent them from changing the terms of the annuity to access extra capital. If a plaintiff has unanticipated future medical needs or higher living expenses, the settlement proceeds will not be available to help pay them.

Often, a structured settlement is only a part of a bigger settlement package. Other components can include a lump-sum payment for immediate expenses and bills that have already accrued, along with attorney’s fees and litigation costs. A blended agreement can remove one of the most common objections to a structured settlement by providing a plaintiff with some money upfront to take care of their current needs and settle outstanding obligations.

If you were permanently injured in a vehicle accident, medical malpractice case, or another occurrence, don’t go it alone. An experienced personal injury attorney can help you understand your settlement options and negotiate the best possible resolution.