A car accident leaves someone injured or permanently disabled. The victim decides to sue and wins a large settlement. Should the individual take payment as a lump sum or as a stream of income payments, an arrangement known as a structured settlement? Maybe the individual's attorney and family simply want to take the money, close the case, and focus on healing.
But what is a structured settlement payment? It is a voluntary agreement between the plaintiff and the defendant to pay the settlement in a series of payments over time. The word "structured" simply means that the payments are arranged in a way most convenient for the victim.
Calculating such a settlement can be quite complex. The concept of "present value" is used to determine how much money the insurer needs to pay the settlement over the agreed time period. Present value asks the following question: How much money does the insurer need in the bank today to pay the injury victim a certain amount of money per year for, say, 10 years? Usually the exact amount needed is less than the amount the victim will receive, but this is a complex financial calculation. An economist or actuary may have to be consulted.
To be precise, four pieces of information are needed to calculate a structured settlement payment:
- the year the payments started
- how often the payments are made
- the amount of each payment
- the year the payments will end
To use an example, suppose a individual lost the ability to work in 2013, and won a lawsuit with a total settlement of $2,000,000. The trial takes ten months to complete, and the plaintiff opts for a structured settlement payment ending ten years later in 2023. To calculate the likely monthly amount, we take the settlement amount and divide it by the number of months in those years. This gives us an amount of about $16,000 per month. It is important to note that the monthly payments will not be taxable, so the plaintiff will not have to face increased taxes.
Severe injury is devastating to anyone, especially a family who has lost one or the only source of income that they have. A structured settlement payment helps cushion the blow and provides financial security in dire situations. No one can predict the future, but creating a yearly, quarterly, or monthly income stream certainly helps.