What is a structured settlement?
When a plaintiff brings a personal injury action against a defendant for damages and the parties decide to settle the case, they may enter into a structured settlement to compensate the plaintiff for his injury. Structured settlements are monetary awards for damages that are paid in installments over a period of time. They are frequently used to settle tort cases involving severe injuries in which large damages are sought (e.g., products liability, medical malpractice, and wrongful death cases) because of the defendant’s inability to pay the amount in one lump sum.
How a structured settlement works
In a structured settlement, a defendant typically pays one premium to purchase a life insurance contract. The life insurance company then disburses a lump sum and periodic payments to the plaintiff for a certain number of years. An annuity is generally used to fund the structured settlement award.
The settlement usually contains a lump-sum cash payment for past expenses that the plaintiff incurred, including lost earnings and medical expenses that arose from the plaintiff’s injury. It also provides funds for the plaintiff’s current treatment. Annuities are then designed to provide future payments for items such as ongoing medical care, diminished earning capacity, the educational needs of the plaintiff’s children, and loss of a decedent’s support. In determining the amounts of the future payments, both present value and inflation must be considered. The plaintiff also normally receives attorney fees in the settlement.
Benefits of a structured settlement
A structured settlement may be mutually beneficial to a plaintiff and a defendant. The plaintiff benefits from the superior return on investment of the premium available to the defendant’s insurance company, the classification of the damage payments as nontaxable income to him, and the lack of the burden of determining how to manage a large lump-sum settlement. The defendant can avoid future administrative expenses of making payments, will pay a reduced present value sum, and may not incur future legal fees.