What is a Structured Settlement, and How Does it Work?

A structured settlement is a financial arrangement in which an insurance company or third party agrees to make periodic payments to a plaintiff. It is for a set period to the claimant as opposed to a lump-sum settlement where they would receive a one-time payment instead. 

A structured settlement is a way to resolve lawsuits in certain cases, including car accidents, product liability, medical malpractice, and wrongful death. The structured settlement offers the injured party a benefit that will pay over a set period and are settled using an annuity that pays out over time.

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Some examples of cases that commonly involve structured settlements are:

1. Personal injury cases
2. Wrongful death
3. Medical Malpractice
4. Personal Injury Cases

When someone has been injured in an accident and recovers damages for those injuries, the person may be paid a single settlement amount. This is commonly referred to as a lump sum payment.

In most cases, the person is better off financially with a single large payment rather than smaller payments over time. People usually prefer the larger, present-day settlement because they have medical bills and other expenses now that they want to settle. Claimants can also invest it to gain “compound interest,” meaning that the money grows at an annual rate of interest and earns a different interest rate on top of the amount invested.

Compound interest is a tool for calculating the time value of money, or how a small amount today could grow to a large sum in the future, given adequate returns and time. When you deposit your money into a savings account at a bank, you earn compound interest. For example, if you put $100 into a savings account with a 5% yearly interest rate, you will have made $5 in interest at the end of one year.

The total amount in the account will be $105. If you leave your money to earn compound interest for another year, assuming the same interest rate, you will have made more money and so on.

2. Wrongful Death Case

A wrongful death case can be brought about when someone either accidentally or intentionally kills another person. Given the extreme nature of these, quite often they can lead to a structured settlement being put in place as payment to the plaintiff.

3. Medical Malpractice Case

Medical malpractice cases involve professional negligence by a healthcare that results in injury or death to someone that was in their case. This could be from the point of diagnosis, treatment or post-treatment negligence. These cases have the potential to also be quite extreme given the possibility of serious injury or illness damages and can lead to a structured settlement being put in place for the claimant.