Structured Settlements Explained

You've no doubt seen those ads on TV telling you to call for "cash now" by trading in a stuctured settlement for an immediate payout. But if you're like most people, you might not even know what a structured settlement is. If you have one you probably know that it's not necessarily something that the average person wants to get, or at least they don't want to go through whatever incident causes them to seek monetary reparations. For the uninitiated, structured settlements are generally the result of an accident of some sort that leads to a lawsuit. If, for example, you have been in a serious car accident in which someone else was at fault; if you've been injured on the job and the company or their insurer is fighting the payout; or if you've purchased a product that caused an accident or illness, you might take them to court to get the payments you're due. But what exactly is a structured settlement and how does it differ from other types of monetary awards?

You might think that winning a lawsuit means you'll get all of the money you're awarded immediately, and this is often true. But in some cases, the judge decides to impose a structured settlement, which means that the party being awarded (that would be you) will receive compensation over a set period of time, with scheduled payouts. This could include monthly or annual payments for life (or for a set number of years), or there could be an incremental plan that culminates in a sort of balloon payment at a certain age. And there are a couple of reasons why a judge might decide to go this route.

If the claimant has ongoing medical needs or a chronic condition as a result of whatever incident or accident has led to the lawsuit, the judge may deem it necessary to spread out payments in order to ensure that the awardee has a sustainable income of sorts that will cover related costs for the foreseeable future. Or if the claimant is very young, irresponsible, or has some kind of mental impairment, a structured settlement may be awarded as a precaution, to ensure that a lump sum meant to cover ongoing medical costs doesn't get blown in a frivolous manner. Often, underage claimants will be given a structured settlement that delivers until a certain age (say 25), at which point they will receive the remainder of the money as a lump sum, when they are presumably responsible enough to spend it wisely. To some extent, it also has to do with taxation, since receiving periodic payments, as opposed to a lump sum, could result in certain taxes on a settlement being waived.

In many cases, a structure settlement is meant to protect the person who receives it from suffering further losses as a result of the incident that brought on the lawsuit in the first place. If a 16-year-old gets a $1 million settlement as a result of a car accident because he is likely to have ongoing medical needs related to the incident, he might spend it on toys or bad investments and end up with no way to pay his medical bills down the line. Structured settlements reduce this likelihood. Of course, such awards will vary greatly based on the factors of a particular case. But they are basically payment plans that result when a claimant must sue an insurer or other responsible party for compensation following an incident or accident that caused ongoing medical issues.

To find out what your settlement is worth, run the numbers with out settlement annuity calculator to get an estimate of its value.

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