What Is a Structured Settlement and How Does It Work?

What Is a Structured Settlement and How Does It Work?

Are you trying to figure out the answer to, “What is a structured settlement?” Read this article to learn more about it and how it works.

What does Kellogg have in common with Dannon? Besides manufacturing food products, both corporations had to pay their consumers millions of dollars in damages in the form of a settlement. Whether a lawsuit involves a billion-dollar corporation or just an average person, the process of settling is complicated. Anyone involved in a lawsuit may find themselves wondering, “what is a structured settlement?” Knowing the structured settlement process is one piece of a very large puzzle. Let’s go over the definition of this type of settlement, then deep dive into the specifics.

What Is a Structured Settlement?

A structured settlement is a regular payment over a period made toward the plaintiff, the person who initiated the claim. The defendant, the person who the claim is against, makes the payment. The payment distributes over a few years or more, depending on the amount and agreement.

Sometimes, the settlement payments can last a lifetime. This is different from a lump sum payout. A lump sum payout is a single payment made toward the plaintiff. In both types of settlements, the payment agreement settles the case.

How Does a Structured Settlement Work?

Once the structured settlement is agreed upon, there are a few terms to iron out. First, the settlement distribution amount has to be calculated. The total sum of the settlement depends on the claim, but the payout amount can be negotiated. The settlement winner decides how much money they want per pay period, how long the pay period lasts, and how often each pay period happens.

For example, the winning plaintiff may decide they want their settlement monthly for a set amount of years. They may also choose to extend the settlement money to their family if they die before the payout ends. Different types of payout models have different advantages and disadvantages, depending on the case and amount. For this step, lawyers typically consult an economist or financial consultant for advice on the best payout model.

Another factor in this process is deciding who the payout comes from. Whoever is responsible for paying the settlement has to rely on an insurance company to administer the payments as an annuity.

Comparing Structured Settlements to Lump Sum Settlements

If you ever find yourself in a situation where you win a settlement, you have the option to accept the money as a lump sum or a structured settlement. Both options are viable, but choosing the type of payout depends on the type of case and the personal preference of the case winner.

A structured settlement is a superior choice for settlements involving a lot of money. This settlement is taxed less, so you gain more money over time. A lump sum settlement is attractive because you gain a large sum in a short period of time. Gaining money upfront is ideal for people who have immediate costs to cover. However, this choice is taxed. This choice is best for small payouts. If you choose a structured settlement, but later decide you want a lump sum payout instead, you can sell your settlement for cash.

Knowing the answer to “what is a structured settlement” is vital for people in the midst of a lawsuit or any other legal battle. The process of settling is complex and requires many important decisions to be made. With the right approach, your settlement case will run smoothly.