What is a Structured Settlement?
A structured settlement is a periodic payment plan, usually arranged
between a claimant and a defendant in a tort suit. For example, a
structured settlement might be arranged between a person who has been
injured and the person who caused the injury (or often times, their
insurance agency).
In return for periodic payments, the claimant agrees to drop the suit. The end result is that the claimant is able to receive compensation for their injury in a way that will allow them to pay for expenses and medical bills over a long period of time and the defendant is potentially able to avoid a long and difficult court case. Often times, therefore, a structured settlement is an agreement that can satisfy the needs of both parties.
How are Payments Distributed in a Structured Settlement?
Every structured settlement involves a unique negotiation between claimant and defendant. The amount of each payment and the frequency of payments can be decided in any manner if it is agreeable to both parties.
Some examples of common methods of distributing payments in a structured
settlement include annual payments in which the claimant receives a
small sum every year for a certain period of time -- often times, his or
her lifetime. This can be a good option for claimants whose medical
needs are expected to stay relatively stable over a long period of time.
Another common method is to disburse a larger lump sum every few years.
This can be a good option for people who may need to periodically
purchase expensive medical equipment. Finally, a structural settlement
can be arranged to pay specific lump sums at specific times -- for
example, in the case of an injured child, disbursements can be arranged
to occur at the time the child will be entering college, moving out on
his or her own, and then several times thereafter.
Often times, a structured settlement will no longer distribute payments after the claimant's death. This can present problems, especially in the case in which the severe injuries that led to the settlement may also claim a person's life earlier than expected. Fortunately, it is possible to arrange structured settlements so that they will pay out any balance into the claimant's estate after death or so that they will pay out a minimum number of installments.
However you and the defendant decide to arrange your structured
settlement, it is important to be aware of the fact that once the
decision is made, it cannot be changed. So if your medical or monetary
needs change later in life, your structured settlement might not end up
meeting your needs. Therefore, before entering into a structured
settlement, carefully consider not only your present medical and
personal needs, but also any anticipated future needs.
For example, a young claimant should consider the fact that his or her medical needs will become greater as he or she ages. Claimants with certain medical conditions should find out with consultation with their physician how their medical needs will change as their disease or condition progresses or worsens. On the other hand, some people will end up needing more of their structured settlement initially and less as time goes on and their condition heals or is treated. Claimants should also consider any significant life events they expect to occur in the coming years, such as college attendance or additional schooling, moving, marriage, and childbirth.
What if I Need More Money than my Structured Settlement Pays Out?
Often times, people opt for a structured settlement simply because it
makes the most sense given their personal or medical needs at the time
of the settlement. Then years later, their needs may change, making the
small periodic payments offered by the settlement insufficient. For
example, the claimant may end up needing a larger lump sum for the
purchase of expensive medical equipment or a modified handicapped
vehicle. In other cases, a person simply decides that they would prefer
to have full control over their money.
Fortunately, it is possible to convert a structured settlement to cash. In brief, the recipient of the structured settlement can sell the settlement to an interested company for a lump sum. The money is then immediately available for various necessary purchases. Some people can also end up profiting by selling a structured settlement and then judiciously investing the lump sum and receiving interest income.
However, it is important to keep in mind that you may end up losing money when you sell your structured settlement, since the company that purchases it will try to profit from it by making relatively low buyout offers. Whether this loss is important to the seller and how much will be lost depends on the specific offer provided, as well as the money management skills of the seller. For many people who need to make a purchase for medical or personal reasons, taking a small or moderate loss may be more than worthwhile.