A structured settlement is not an uncommon term, even for most laymen. The term is often evident during lawsuits that involve personal injury or wrongful death. However, the concept of a structured settlement can be expanded further than that.
What is a Structured Settlement?
A Structured Settlement is one of the possible outcomes of a lawsuit that arises from a number of different situations. The most common types of suits that result in a structured settlement are: personal injury, wrongful death and medical malpractice. When insurance companies are responsible for paying out an award for one of these lawsuits, they will use a structured settlement as a way to pay the award money slowly over time instead of all at once at the completion of the lawsuit.
Periodic vs Lump Sum Payments
When an insurance company awards a settlement in one of these cases, they look at a few different factors when assigning the payment stream. The frequency and size of the payouts will depend mostly on the following:
- Current Financial Situation – employment status, debt incurred, current income and spending
- Medical Bills- current, reoccurring or future bills based on health issues (if applicable)
- Possible future costs- upper-level education, major life events, children
- Guaranteed vs. Life Contingent Payments
Typically, the payment stream set up to payout a structured settlement is only guaranteed up to a certain point in the recipient’s life. During the initial stages of structuring a payment stream, the insurance company will analyze the specifics of a case and decide upon a date that the payments become life-contingent, meaning the payments will stop if the recipient is no longer living.
The most important thing to remember about the difference between guaranteed and life contingent payments is that guaranteed payments can be assigned a beneficiary- typically a family member or estate of your choosing whom you want the payments to be made out to in the event you pass away. Life Contingent payments cannot be assigned to a beneficiary. They can only be paid out to the recipient of the structured settlement while they are living.
The Process of a Structured Settlement
The process for this type of settlement is quite complex but aids in a simpler solution. In several court cases, the plaintiff is owed money by the defendant. The issue is often resolved by agreeing to settlement cash paid periodically instead of the defendant paying a lump sum. The settlement cash and the schedule according to which it will be paid are to be decided through negotiation between the two parties. The decisions are taken according to the needs of the plaintiff. The structured settlement requires a hired consultant that monitors the negotiations between the two parties.
Once the structured settlement is decided and paid, the consultant will buy an annuity from a life insurance company. This will act as the periodic payments for the plaintiff on behalf of the defendant.
This annuity is protected by the insurance company separate from the party that is at fault. This kind of investment is not vulnerable to market changes, recessions or similar risks. Therefore, the plaintiff will be receiving money for the rest of their lives or a set period of time without any interruption or risk.
Many of these settlements will set the plaintiff financially for life. While some people genuinely deserve this arrangement and its benefits, others can take undue advantage out of it. According to the National Structures Settlements Trade Association, around $6 billion is issued in structured settlements each year.