Innocent victims who suffer catastrophic brain injuries or other serious injuries which impair their lifetime income earning capacity will receive a very large lump sum settlement. At the time of settlement, we advise our clients to invest a portion of the lump sum in a “structured settlement” and receive tax free monthly cash payments for life indexed to inflation. This provides a significant advantage as the injury victim who cannot work will have a steady stream of income guaranteed for life to provide for his or her needs. The payments are indexed to inflation so every year the monthly payments will increase.
Victim Can’t Blow It All
Perhaps the best reason for placing a large lump sum personal injury settlement award into a structured settlement is the fact that the structured settlement is irrevocable, and therefore the victim (or family members wanting money) cannot collapse it in the future to get at the lump sum.
This is important because a well-known American study indicates that within two months following receipt of a significant monetary settlement (personal injury award, fatal accident award, lotteries, sweepstakes, insurance, inheritances, etc.), 25% of the recipients had nothing left. By the end of the first year, 50% had nothing left. By the end of the first two years, 70% had nothing left. And within five years of settlement, 90% of the recipients had nothing left.
Another huge advantage of a structured settlement is that a catastrophically brain injured victim or other very seriously injured victim in Alberta is often on AISH (Alberta Income for the Severely Handicapped) and if they have a large lump sum of money in their account they will lose their AISH payments as they will no longer qualify. Since AISH uses the definition of income under the Income Tax Act and the Income Tax Act says structured settlements from personal injury claims are not income, the structured settlement will not be considered income or an asset in calculating eligibility for AISH. Therefore, the severely brain injured victim may maintain his or her AISH payments.
Protect Your Future
Therefore, given the above statistics, if you are receiving a large lump sum personal injury settlement award, and you need that money for your long-term future income supplementation and payment of future medical costs it is, in our firm’s opinion, imperative that a good portion of your settlement be placed in a structured settlement indexed to inflation to avoid the catastrophe that the above statistics represent. In other words, do not think that you will be the exception to the rule when the statistics indicate that 90% of recipients have nothing left of their significant monetary settlement after five years. Please also be aware that our law firm does not receive any fee or compensation whatsoever from the life insurance annuity company for placing the annuity. In other words, we are not in a conflict of interest in recommending a structured settlement for catastrophically brain injured clients.
Objections to Structured Settlements
Because of long term low interest rates, and given that structured settlements are conservative investment vehicles and the rate of return is based upon the rate of return of bonds, many people feel that a structured settlement is a poor investment as they could do better in the stock market. Setting aside the long-term return in the stock market being only marginally better than bonds, and setting aside the fact that in the stock market one can lose 50%, 75%, even 100% of investment capital, structured settlement companies recently developed two products to address people who still want to invest in the stock market with their personal injury settlement.
The first new product is a Market Indexed (MI) structured settlement. In a MI structured settlement, the indexation takes place by reference to market performance of the S&P 500 as opposed to the Consumer Price Index. A Market Index structured settlement has the certainty of a floor value and the upside benefit of increased income based on market performance – however it is capped with an annual ceiling at 5%.
The second new structured settlement product is the Convertible Lump Sump. This allows the injured victim to receive a specified lump sum payment on a specific future date with the goal that the victim will reinvest that sum in a predetermined structured settlement plan which would presumably be at higher interest rates sometime in the future.
The foregoing two products are a very good answer to victims who still are misguided by financial planners who want to steer them into the stock market (because of greater fees to the financial planner), as it allows for some upside to market performance. The bottom line however is that with existing structured settlements, and even without the foregoing innovations, structured settlements significantly beat comparable investment options when compared with the fact that structured settlements have tax free status. Only structured settlements from injury claims have tax free status – so take advantage of this tax concession if you are an injury victim.
If you are the victim of a serious motor vehicle collision and will have impaired work/earning capacity going forward, or future treatment costs, it is crucial that your personal injury lawyer discuss the structured settlement option. Indeed, in our opinion for the severely disabled it should form part of every large injury settlement.