When tragedy strikes, many families turn to an attorney in hopes of capturing damage recovery from an insurance company or at-fault third party. For some, third party liability leads the way into a law suit, settlement or agreed judgment in recovery of monetary damages. Unfortunately, for some attorney clients, the process by which settlements are handled is often confusing and leaves the client in a quandary, unsure if the monetary terms of settlement are appropriate enough to provide the adequate compensation based on the traumatic event. For individuals who experience the third party settlement process, understanding the financial tool often used in settlement proceedings, known as the structured settlement, will provide for a more confident understanding of the settlement process.
Structured settlements are a unique legal and financial tool which is commonly used in the United States as well as many other progressive countries. In history, prior to the use of structured settlements in the resolution of third party law suits, insurance carriers were required to pay out large sums of money to a plaintiff only to find the plaintiff, with unlimited discretionary use of the monies, would utilize the settlement funds for payment of items unrelated to the original principles of the law suit or tragic accident. Following lack of discretion, many plaintiffs would find the settlement monies would be spent, leaving many years of unpaid services for which the settlement monies were originally intended, i.e. medical expenses.
In an effort to assist the plaintiff in obtaining some control over the financial gain from a third party lawsuit, the federal government began to recognize structured settlements as a unique alternative to the lump sum payment. It is through the structured settlement that the plaintiff, as well as the defendant, can reach an agreement not only in terms of dollars but also, to some extent, how those dollars are applied.
When creating a structured settlement, for example, in a personal injury case, oftentimes the settlement dollars, in part, are designed to meet the future healthcare needs of the plaintiff. As a result, a structured settlement may provide for not only a monthly annuity payment but may also allow for a specific allotment of monies to the benefit expense payments. To the benefit of the plaintiff, in the personal injury law suit, the settlement monies are spent on the service for which they are designed and not spent on programs outside of the terms of the settlement agreement.
To the benefit of the defendant, most often the insurance carrier, the structured settlement provides for a method in which to save dollars on large settlement cases. In prior lump sum payments, a $1,000,000.00 settlement meant just that. $1,000,000.00 was paid, in a lump sum, to the plaintiff. In today’s structured settlement programs, this $1,000,000.00 can be purchased in the form of annuity, discounted using a mathematical time value formula, often resulting in a $1,000,000.00 annuity purchases for less than $600,000.00. This translates into a significant savings to the insurance carrier and, in term, places some control over the anticipated increase in premiums to all insurance clients.
For many attorney clients, understanding the outcome of the structured settlement terms is simple. It is the question of “why” the structured settlement is used in the first place. Understanding the structured settlement will provide not only a financial benefit to the client, but also the insurance carrier, will ensure a fair settlement is reached in most personal injury, or third party, lawsuits.