How_A_Structured_Settlement_Really_Works
Doug Smith

Defined Tag: Structured Settlement.

The phrase structured settlement is often on the news and in television commercials. The phrase itself sounds partly financial and partly legal. It involves both large amounts of money, and the legal court system. So what is it?

The word "structured" means highly organized, having a well-defined organization, or occurring at very specific intervals.

A "settlement" is a way of concluding a court or legal case, often without the hassle, pain, and expense of a trial. A settled court case often involves a the defendant pleading to a lesser charge, or less jail time, or, in the case of a large company, agreeing to pay the plaintiff a large amount of money not to proceed with the court case. For the purposes of this article, the last definition applies.

Once the plaintiff agrees to drop the charges in exchange for a cash settlement, he or she is awarded the cash amount agreed upon by the lawyers and/or the judge. Many companies simply don't have millions of dollars in cash available to write a huge check to cover the settled amount. Therefore the court may allow the financial amount to be structured. This means that the plaintiff will receive the entire cash amount, but the money will be split into annual amounts that are much smaller than the original settled amount. These amounts may continue for many years or even decades.

For example, a $1,000,000 cash award might be converted into $50,000 annual payments stretched over 20 years. 20 times $50,000 is still $1,000,000, so the plaintiff gets all the money, just not all at once as a lump sum.

The defendant, who has to pay the legal award, usually sets up an annuity with a special insurance company. An annuity is a large amount of cash deposited into an interest-bearing account, but this amount is still less than the full amount of the court's award. The amount of money deposited is large enough that the annual interest is enough to pay the yearly amount, which is $50,000 in this example. Each year $50,000 is removed from the annualized account and disbursed to the plaintiff. The account begins accruing interest for the next year's payment.

Splitting huge financial awards into periodic payments over time is a win-win situation for both parties. The injured party receives all the money awarded by the court during the settling proceedings. The company paying the award doesn't go bankrupt trying to write a huge lump sum check for millions or sometimes tens of millions of dollars. The plaintiff is financially secure for the life of the annuity, the defendant satisfies all legal requirements by paying the settled amount. Therefore the structured settlement is a convenient legal and financial instrument for paying huge monetary awards over time.

This article is Copyright 2009 by Doug Smith. All Rights Reserved Worldwide. Unauthorized Duplication Prohibited. For Entertainment Purposes Only. Not Intended As Financial Advice. Consult Your Own Financial Professional.