It’s always challenging to quantify the risk of accepting a lump sum, instead of a structured settlement offer, when settling a claim. Lump-sum offers tend to look more appealing on paper, while structured settlements offer long-term financial security. One commonly quoted statistic states: “Within five years, 90% of claimants have completely dissipated their cash settlements.”

Why are settlement funds going so fast?

There were numerous studies conducted that observed groups of Americans who received large sums of money. One observed a group of lottery winners, and another studied a group of lump-sum settlement recipients. Out of 300 multi-million-dollar lottery winners, 60 of them found themselves facing financial difficulty soon after winning. The other study saw that nearly 100% of the settlement recipients had lost all their settlement money.

This shouldn’t be particularly shocking considering all the data that suggests Americans have trouble saving money. Most Americans have less than $1000 in savings, and there has been a significant increase in personal bankruptcies filed since 2008. In 2009, Vanderbilt University determined that despite receiving enormous wealth, lottery winners filed for bankruptcy at the same rate as non-lottery winners.

Perhaps the best study of this was presented in the book Lottery Winners, How They Won and How Winning Changed Their Lives by Roy Kaplan. People who received large lump-sum winnings tended to purchase expensive luxury items, spend huge amounts of money on vacations or homes well beyond their needs, and engage in lifestyles far beyond their pre-winning lifestyle. Most unfortunately, they were nefariously besieged by “friends” and relatives looking for a handout or wanting to give them advice on how to spend and invest their money.

The San Francisco Chronicle reported that a man who had won $2.57 million in the lottery was found dead two years later, homeless and without a cent. In another case, a Florida woman won $5 million in the Powerball lottery – and in three years, had nothing left and owed the IRS $500,000 in back taxes.

Studies of settlement fund dissipation

The most quoted source is the Personal Injury Guide by Justice Zerne P. Haning III (Ret.), William F. Flahavan, and Daniel J. Kelly from the Rutter Group. The guide states that between 25% and 30% of accident victims spend their entire settlement within two months – and 90%spend theirs within five years. An earlier source, Structured Settlements – the Increasing Role of Periodic Payments in Settlement Negotiations, by Michael Reagan and Kevin Hoerner, cited similar results.Similar results have been reported in several other journals, including Anatomy of a Structured Settlement published in 1985 and Insurance Counsel Journal in 1978. The Journal relied on internal insurance company studies as its basis for the 90% dissipation statistic it reported. “The Widow’s Study”, compiled by LIMRA in 1971, reported that widows spent most of the death-benefit money from life insurance within 18 months. Unfortunately, none of these statistics have changed much in recent years.

Impact of age on fund dissipation

The Department of Labor conducted a study to determine how families handled lump-sum distributions of retirement funds. The study found that the younger the recipient, the faster they spent the money. For retirees 55 and older, only 42% of the money was put into retirement savings. For those aged 45 to 54, only 34%; 35 to 44 saved 27%: those aged 25 to 34 only put 14% of the money into retirement savings.

The tragedy of financial mismanagement

The National Structured Settlement Trade Association (NSSTA) compiled several of these tragic examples such as Scott Mickler, who took a $2 million lump-sum settlement to settle his injury claim that left him a quadriplegic. He later married his nurse, Cheryl Crawford, who abused him, got him addicted to drugs, and siphoned off all his money. He later died from the abuse and neglect at the age of 31. Crawford is currently serving a 15-year sentence for abuse and neglect leading to the death of Mickler.

Carol Bitterman had an allergic reaction to sulfa that made her a paraplegic. She received a $2 million settlement in cash. At first, Carol did well, becoming a champion track and field athlete at various events for the handicapped. A casual user of marijuana, her problems began when her dealer got her addicted to cocaine and moved into her house. The lure of Carol’s money attracted a supplier, who also moved in and made her home a distribution center for heroin and cocaine. Carol was kept isolated from her family and friends, and imprisoned in her own bedroom without the use of her wheelchair. After several years, her friends were able to rescue her, with the aid of the police, but her body was ravaged by drugs and abuse. Carol later died at the age of 36.

Other stories, while not as extreme, are just as tragic. Shirley Adams received a $250,000 settlement to care for her daughter, Tiffany, who suffered brain damage. Her husband invested the money in his construction company to provide a solid future for his wife and daughter. The company went bankrupt and the money to care for Tiffany was gone. Shirley and her husband divorced, and she receives no child support.

Parnell Augustine was left a paraplegic after a motorcycle accident and received $2.1 million, which he placed in the care of a stockbroker. Unfortunately for Parnell, his broker had invested the entire sum in tech stocks which ultimately became worthless.

It isn’t just bad individual choices or bad luck that leads to dissipation. There is an entire psychological and environmental change that accompanies receiving a large sum of money.

When in doubt, seek professional help

A lump-sum settlement of cash won’t automatically make you happy and certainly won’t guarantee you have enough funds to take care of your future medical and subsistence needs. For some, it might be the worst settlement possible, leaving them vulnerable to opportunists and predators.

Claims handlers and lawyers can help secure a settlement, and financial planners can help with investments, but only a structured settlement consultant can ensure injured parties successfully stretch their settlement funds over the course of their lives.


by John McCulloch, JD/MBA, CSSC