To structure, or not to structure? That is the question for the purpose of this entry in the Toronto Injury Lawyer Blog. Sometimes, whether to enter in to a structured settlement is not an option; rather a requirement. Other time, you may have a decision to structure or not.
WHAT IS A STRUCTURED SETTLEMENT?
A structured settlement is a negotiated financial arrangement whereby an injured accident victim agrees to accept a usually large lump sum of money in the form of a settlement from a personal injury claim. That lump sum is then placed in to an interest bearing financial instrument (called a structure) which gets paid out in periodic payments over a long period of time to the Plaintiff.
Instead of receiving one large lump sum at one time, the Plaintiff instead receives periodic payments (usually every month) set over a schedule which normally lasts a life time.
The monthly payments, administration and maintenance of the structure are not charged to the person receiving the structure, unless otherwise specified.
WHAT ARE THE ADVANTAGES TO A STRUCTURED SETTLEMENT?
The monthly payments are guaranteed and tax free. This is very important given how taxes work in Canada.
A Plaintiff cannot lose or mismanage their money as opposed to a lump sum which can easily get mismanaged in one way, shape or form. This provides the Plaintiff with a greater degree of financial security over the course of their lifetime. This is particularly important when there are on going future care needs for the injured accident victim. By contrast, one bad decision with a lump sum will present a lifetime of financial uncertainty.
Because structures bear interest and are usually guaranteed over one’s life time, the Plaintiff has to potential to earn considerably more money over the period of the structure, than via one lump sum payout. In short, the longer the Plaintiff lives, the more money they earn in the structure.
Take the example of a lump sum of $580,000 being placed in to a structure when the injured accident victim is 30 years old. Monthly payments, which earn compounded interest can easily return over $1,000,000 after 20+ years over the course of the structure.
For all of these reasons, Courts like structures. For Judges and insures alike, a structure presents a guaranteed, tax free vehicle which cannot be mismanaged unless the injured claimant takes their monthly structure cheque and spends it recklessly, month after month over the course of their lifetime. Month after month of reckless spending is just that. But, it requires month after month of effort to do so. Opposed to a lump sum which only requires one bad financial decision to be made.
Structures are as flexible as you want them to be. If you don’t want to get paid every month, and instead want to get paid every two months, this can be arranged. If you want to get paid once every two weeks, this can likely be arranged as well, although it’s not as common as monthly payouts. If you want a larger sum to be paid out quarterly, this can be arranged as well. There are many options in a structure to make it flexible for you. You can also play around with the payout amount and interest to make payments higher at the beginning of the structure and lower at the end, or vice versa. The point is that the structure can be suited in many ways, shapes and forms to best suit your needs.
Certain insurers require that lump sum settlements get placed in to a structure given all of these advantages.
WHAT DOES A STRUCTURE COST?
In the context of personal injury claims, generally the structure costs ZERO to the injured accident victim. The cost of setting the structure is generally set up at the expense of the insurance company, and does not come out of your award.
Any set up fees, administration fees, etc. are also absorbed by the insurance company. And, if the recipient of the structure has any questions about payments, etc., they can always contact their structure company or adminstrator free of charge.
IS DIRECT DEPOSIT AVAILABLE FOR MY STRUCTURE CHEQUES?
Yes! But ask your structure company or administrator to be certain.
CAN MY STRUCTURE BE UNDONE?
Not in Ontario. In the United States, there are certain companies which undo structures. These companies will examine the amount of money in the structure, the age of the accident victim, and the length of time left for payments, and then offer a lump sum in exchange for an assignment of the monthly structure payments to their company.
This concept of undoing structures is not permitted in Ontario. Structures in Ontario are for the most part non-assignable, and if they are; they are not assignable for the purpose of having them undone in such a way.
WHAT IS A REVERSIONARY INTEREST?
Most insurance companies who pay money in to a structure will seek a reversionary interest. It’s essentially a life insurance policy on you. If you die within a few years of the structure payout, the insurance company wants the remaining money left out in the structure, or a certain percentage of that money back.
From an insurer’s standpoint, the lump sum which they have paid out in to the structure represents a certain number of years of benefits. Let’s say 20 years. But if you die in year #1 of the settlement, the insurer has now overpaid for 19 years.
The reversionary interest protects the insurer in this scenario in the event of pre-mature death.
HOW MUCH MONEY WILL I RECEIVE OVER THE COURSE OF THE STRUCTURE?
This question can be answered with mathematical certainty by your structure company. They will have prepared a chart or schedule showing the date payments are made, the quantum of the monthly payment, along with a tally of how much money has been paid to date. This schedule will also show this information for future payments. So, if you want to know how much your monthly payout will be on October 1, 2025, and how much will have received by that point in time, they can tell you. A rule of thumb is that the longer you live, the money money you will receive from the structure. That sum of money you receive over the life time of the structure can easily exceed the amount of the initial lump sum deposit.