Structured Settlements

By Paul Mitchell, Q.C.
Categories: Personal Injury

A personal injury claim can either be settled by way of a lump sum payment or by way of a structured settlement or a combination of the both (i.e. part lump sum, part structured settlement).  If the matter proceeds to trial a Judge or jury may only award a lump sum payment.  A structured settlement is a settlement in which the victim is compensated over time rather than receiving a single lump sum payment.  A structured settlement may only be utilized in a personal injury action when the matter is settled out of Court.  The main advantage to a structured settlement is that the payments the client receives over time are received tax free. This income tax advantage was created as a matter of public policy by the Federal Government many years ago to encourage out of Court settlements in personal injury claims.

The stream of income is provided by the purchase of an annuity from a Life Insurance Company. The major advantage to the Plaintiff is that all the periodic payments are tax free. What follows is a summary of some of the advantages and disadvantages to both the Plaintiff and to the insurer (Defendant).

A structured settlement should be seriously considered in every major personal injury case.

ADVANTAGES TO THE PLAINTIFF

All periodic payments are tax free to the recipient. In lump sum Court awards the interest generated from the Plaintiffs investment of the monies is taxable. This advantage has been reduced somewhat by the Court’s allowance for a "tax gross-up" in lump sum awards to account for the impact of taxation awards for future care only.

Funds in a structure are not prone to being squandered or spent too quickly.

The income stream can be designed (or structured) to meet the individual needs of the Plaintiff. They can be indexed for inflation and lump sum payments in the future may be included.

The money is managed without expense to the Plaintiff.

The periodic payments are guaranteed by both the insurer and the annuity company.

DISADVANTAGES TO THE PLAINTIFF

The funds are locked in at today’s interest rates. You cannot decide at a later date to "cash out the settlement".

The rate at which the structure is indexed is set for the life of the annuity. If inflation skyrockets to a higher rate than the indexing rate used, the real purchasing power from the monthly payments would be substantially reduced over time.

ADVANTAGES TO THE INSURER (DEFENDANT)

If the intent is to provide the Plaintiff with a certain income stream over time there are cost savings to a structured settlement. It costs less to purchase an annuity than to provide a lump sum that would be invested to yield the same stream of after-tax income from a lump sum.

The structure may contain a reversionary clause which allows the remaining payments to be made to the insurer if the Plaintiff dies before the end of the guarantee period.

DISADVANTAGES TO THE INSURER (DEFENDANT)

The insurance company remains contingently liable for all the payments for the life of the annuity.

The ongoing bookkeeping requirements for tax purposes.

STRUCTURED SETTLEMENT DEFINITIONS

Annuitant:  The owner of the policy.

Annuity Policy:  The contract between the owner and the issuer where the issuer agrees to pay specified amounts of money at fixed intervals to the annuitant who is the owner.

Beneficiary:  The person who is entitled to receive further payments on the annuity should the Plaintiff (the measuring life) die, where the agreement specifically contains a guarantee period and where death occurs prior to the end of the guarantee period.

Guarantee:  Most policies provide that the periodic payments may be guaranteed to be paid for a certain length of time even if the Plaintiff dies. If the Plaintiff dies before this guarantee period the annuity may form part of his or her estate and the payments will continue to be made for the balance of the guarantee period. If the Plaintiff lives beyond the guaranteed period he or she would continue to receive the annuity payments for the balance of their lifetime, if the contract was life contingent.

Indexing:  The annual increases to the periodic payments to cover the increase in the cost of living.

Issuer:  The company that issues the policy is generally a life insurance company. These issuers are normally one of several major Canadian life insurance companies with assets of in excess of $5 Billion.

Measuring Life:  The party in whose life the annuity policy is placed. This is generally the Plaintiff alone or it could be the Plaintiff and another party.

Medical Age Rate Up: Also means having the Plaintiff "age rated". The actual life expectancy of the measuring life is crucial to the cost of the annuity. For example, if a Plaintiff is normally expected to live to be 76 years old, but because of his injuries is only expected to live to be 56 years old he is "age rated" to "life minus 20". This age rating is determined by the insurance company by their review of medical information regarding the measuring life.

Owner:  The person who pays the premium to purchase the policy.

This article was prepared by Paul Mitchell of Pushor Mitchell LLP of Kelowna B.C. This column is not to be taken as legal advice and readers with any particular requirements should seek legal advice from a lawyer with experience in the area of concern.

By Paul Mitchell