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Structured settlements

Region: Ontario Answer # 927

A structured settlement is a financial arrangement, often involving a life insurance product, that provides for periodic payments (for example, monthly) of a settlement amount.

For example, in a personal injury matter, the successful plaintiff may receive a greater total amount via regular payments over time rather than a smaller lump-sum payment.

The unsuccessful party in a lawsuit, or his or her insurance company, purchases an annuity that exactly fulfils the required payments to the successful party. The annuity is non-commutable, non-assignable and non-transferable. This means no one, including creditors, can change or stop the annuity under any circumstances.

The annuity payments are generally guaranteed for a specific period by the insurance industry, but the original defendant is ultimately responsible for every payment to the claimant. The “guarantee period” may be for the first few decades on a life annuity or for a fixed-term.

The right to structure a settlement must be negotiated during the settlement process and must be part of the documented settlement agreement. The funds to purchase the annuity must pass from the defendant or their agent to the annuity company or its agent. You cannot receive settlement funds first and then purchase a structured settlement annuity after the fact. The annuity must, in fact, be purchased by the defendant or insurance company. During the weeks leading up to settlement, a lawyer should preserve the right to structure any part of the settlement.

In theory, anyone with a life insurance licence can sell a structured settlement annuity. Without specialized experience, however, a structured settlement may be improperly executed leaving the claimant with significant tax liability. Structured settlement brokers (of which there are about a dozen in Canada) are well known in the legal profession and insurance community. The structured settlement broker will usually prepare all the required documents and help calculate the appropriate structure.


 

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