Structured
Settlements
You have probably heard the term “Structured
Settlements” on a TV ad and wondered what exactly it meant.
It's not one of those terms you hear every day...
A structured settlement
is a legal contract under which an insurance company decides
to make periodic payments to an injured person as part of a
bodily injury claim, or to a surviving family member to whom a large
settlement has been awarded... Finding a buyer
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What are Structured Settlements?
A structured settlement is basically a financial or insurance
arrangement between two parties. It usually consists of periodic
payments, or payments made at a regular interval over a predetermined,
extended period of time.
Structured settlements exist in the context of litigation or legal proceedings, specifically those pertaining to personal injury and damages claims. When one party (a person or organization) sues another party for an event that has caused personal injury and damages, the ruling in favor of the injured party includes financial compensation. The injured party, or claimant, then enters into a structured settlement agreement. For structured settlement to be a viable option, the amount to be paid out must generally be over $10,000 in value.
The History of Structured Settlments
Prior to the 1970’s, the courts of the United States and Canada used lump-sum payments to settle personal injury cases. However, in the late 1970’s, the respective justice systems of the United States and Canada adopted structured settlements. Today, paying damages at a set rate over a set period of time has become the most common way of settling personal injury cases.
Other than personal injury claims, structured settlements are also used in other cases where a cash settlement is needed. These areas include, but are not limited to: labor compensation, employment cases, professional liability and domestic relations suits.
What purpose do Structured Settlements serve?
The main principle behind structured settlements is to give the injured claimant, or the surviving family in case the suit involves a fatal accident, a steady source of income over a long period of time.
As such, structured settlements are most common to personal injury cases where loss of income, as well as any other type of loss, is likely to be regular and ongoing. A person who has suffered a severe injury (take for example, the loss of one or both limbs) not only has a loss of income (indeed, a loss of capability to generate income), but also other losses, i.e. insurance or similar payment for dependents, or pension payments.
Structured settlements are also meant to meet the costs of any ongoing, long-term care required by the injured claimant. By deferring payment over a long period of time, structured settlements likewise reduce the risk that a lump sum payment would not be spent on actual care for the injured.
How are Structured Settlements paid out?
Structured settlements involve three main forms of payment: an initial lump sum, a series of monthly payments, and in some cases, periodic lump sum annuities. The sum is to cover the initial out-of-pocket expenses incurred or that will necessarily initial lump have to be incurred by the claimant.
The monthly payments comprise the bulk of the total damages. Typically, negotiations for structured settlements factor in an annual percentage increase for monthly payments, based on the inflation rate.
Periodic lump sum annuities are less common, but still an option on the negotiating table. A periodic lump sum annuity could easily be negotiated if, for example, the injured claimant had a four year-old child and would have to pay a sum of money in fourteen years to cover, say, the child’s college education.