It’s a popular fantasy, one that has probably played out over and over in your mind: winning the lottery and getting to decide how to spend all that cash. But when money is received as part of a personal injury settlement, a much more sombre time in which the payment is designed to compensate a loss, deciding how to manage those resources takes on a much greater importance.

One of the biggest decisions a personal injury victim may face is whether to receive compensation as one lump-sum payment or as part of a structured settlement. Making a wise decision requires a person to carefully consider their specific situation and weigh many different factors – the choice isn’t as simple as picking the option that initially sounds more appealing or gratifying.

A personal injury lawyer can lay out the major differences between them and the advantages and disadvantages of each. A financial advisor can also provide valuable insight and guidance; though there are no guarantees that their investment decisions will pay off, especially in the long-term with lump sums. In some cases, the injured person will have competing voices in the background from family members whose interests are their own. Here a lump-sum payment can quickly be squandered.

In Canada, both structured settlements and lump-sum settlements arrive tax-free. When investing though, it’s important to note that any income from a structured settlement remains tax-free, while that from a lump-sum settlement does not. So, considering taxes, you would need to invest more of a lump sum to realize the same gain from a structured settlement; or you would have to seek a riskier investment opportunity.

Whichever route a person chooses, the biggest difference to recognize is the one between compensation awarded in a personal injury claim and money from a source like family inheritance or the lottery. Compensation is meant to replace past and future lost income and to cover necessary expenses like in-home care and rehabilitation. In some cases, it might be the only source of income a person has for the rest of their life. If the victim is relatively young or there is a need to ensure a constant income stream to cover ongoing medical and rehabilitation expenses, a structured settlement might be the prudent option. It is important to note that in Canada, once a decision to structure a personal injury settlement is made, it cannot be undone. The principal sum is protected and the victim will not have access to it.