Disadvantages of a Structured Settlement

By Bill Herrfeldt

  • Overview

    Most major settlements today, particularly those that are arranged outside of court, are so-called structured settlements. Under such an agreement, a party will receive periodic payments until the agreed-upon obligation is fulfilled rather than receiving a lump sum payment. While that party will enjoy receiving these periodic payments, he will soon realize that there are disadvantages to such an arrangement.
  • Time Frame

    Often, with the intent of avoiding a lengthy court trial, an injured party will agree to receiving payments of the debt over time, rather than a lump sum payment. Unfortunately, with the escalation of settlements that have taken place, it makes little difference whether the case is adjudicated in court rather than out-of-court because the majority of payments agreed upon are structured, anyway.
  • Size

    In personal injury cases, often the amount a plaintiff will receive per month from the defendant is less than the medical bills that have accumulated as a result of the accident. In most cases, he will be able to cover day-to-day expenses, but he will not be able to easily pay the major medical expenses that have arisen. Plaintiffs under these circumstances suffer frustration by realizing that it might be years before these expenses can be paid.

  • Features

    The person receiving periodic payments will always be at the mercy of the one paying him. For example, there is always the risk of not being paid in the future because a company may go out of business. Even though insurance companies often buy annuities to cover future payments resulting from a loss, there is always the concern that payments will stop being made.
  • Considerations

    Generally, an insurance company will try to avoid having the obligation for structured settlements on its books, so it will pay another company who will then assume the obligation to pay the injured party. This creates concern with payees because of the uncertainty of who is obligated to make the future payments. Also, payees should be concerned about the financial strength of the company assuming the obligation.
  • Prevention/Solution

    There are companies that stand ready to purchase structured settlements, receive periodic payments and make lump sum payments. Those companies provide a way to avoid the problems set out above. Since those companies agree to assume the risk for future payments, they will pay a discounted amount for structured settlements. If you are interested in selling a structured settlement, shop around for the best value.
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