The pros and cons of structured settlements

The structured settlement process is often unknown territory for accident victims, which is why Ottawa personal injury lawyer Howard Yegendorf takes the time to explain the positives and negatives to his clients.

“Very few clients know exactly what a structured settlement is. Unless they have been through a personal injury situation before, it’s a foreign concept.”

When a plaintiff agrees to resolve a personal injury claim by receiving a settlement, part or all of those funds can be paid as an annuity or as a lump-sum amount, says Yegendorf, founding partner of Howard Yegendorf & Associates LLP.

“There are pros and cons to structured settlements, and I lay them out and let the client decide,” he says.

The major benefit of a structure is that it’s a tax-free guaranteed payment for a plaintiff’s lifetime or a certain period of time. Because it’s underwritten by the Big Four life insurance companies in Canada, the chance of default is slim.

“It’s bulletproof,” Yegendorf says. “Over the course of your life, you could lose your job or your house, go bankrupt, get divorced or lose in the stock market. With a structure, that monthly payment will still be there for you.”

He adds that the funds cannot be used as security for a loan, which provides extra protection.

Yegendorf says one of the downsides of a structure is that when the plaintiff dies, the remaining money goes back to the insurance company rather than to their estate.

“If you’re a 35-year-old with a $1-million structured settlement that is going to pay throughout your lifetime, but you die at 45, that’s it,” he says. “Whereas if you did not structure it, and instead invested the money and after 10 years you had $800,000 left — that remainder would go to your beneficiaries.”

He says there is the option to purchase a guarantee period for a structure. For example, if a parent wants to make sure that their child is looked after until they finish university, they could buy a 20-year guarantee. In that case, the structure pays the monthly payment until the end of the guarantee period even if the plaintiff dies.

Another downside is that structured settlements do not earn a high rate of interest, but they are tax-free, he adds.

“If you structure $1-million, you do not have to pay any tax on the interest earned that structure. If you instead invested in a mutual fund that earns 10 per cent a year, that $100,000 is taxable,” Yegendorf says. “Whereas if you put that $1 million into a structure and it earns three per cent, that $30,000 is non-taxable. It accumulates within the structure and it always pays out tax-free.”

He says if a client appears financially vulnerable he will strongly recommend a client structure their settlement money.

“For example, I had a client with serious addiction issues who involved in a bad crowd,” he says. “If she received all of her money at once, it likely would be gone very quickly.”