by Sue A. Sponte

Created on: March 13, 2011   Last Updated: March 14, 2011

Often, lawsuits are resolved through the use of structured settlements. These are payment arrangements other than a lump-sum, where one party agrees to arrange for a periodic payment to the other party in exchange for ending the lawsuit. Although these settlements have the same legal effect as other settlements (that is, they will result in the lawsuit being dropped) they have their own benefits and drawbacks that all parties should consider.

The idea behind a structured settlement is that in some cases a recurring small payment is more helpful than a single payment today. For example, if a person was injured in a car accident and the intent of the settlement is to account not only for the medical bills that have already come due but also for the increased medical bills that might be coming up for years to come, then a monthly or yearly payment for those bills might help the injured person budget for the bills. Or in the case of a dispute over retirement benefits owed to a former worker, a monthly payment will give income stability throughout retirement.

There are also advantages for the person making the payment. Many companies who are settling a lawsuit are doing it because they want to get the experience behind them and move on with their business. Using a structured settlement allows them to determine a fixed amount that will be paid now in order to by an annuity, and then turn over administration of the annuity and its payments to a third party. This allows the payer to avoid dealing with frequent requests for a monthly payment years into the future. The payer buys, for a small premium, the services of an annuity provider to administer the long-lasting consequences of the settlement.

The situation is also a win for the administrator of the settlement. The most common way to administer a structured settlement is for the payer to contract with a life insurance company or other large financial organization to buy an annuity which will then be paid out over a period of time. Those organizations charge an administration fee for their services, and are already in the business of paying out annuities. It is additional business and revenue for them

There are some drawbacks to structured settlements. For the recipient, sometimes a structured periodic payment is less beneficial than an up-front payment. For example, some people might prefer to get a large payment now to pay off the house and never have to worry about making a monthly mortgage payment again. The structured settlement does not allow that flexibility. The structured settlement also will often increase the total amount paid by the payer, because the commissions and fees from the annuity provider do not just materialize out of thin air. Finally, a structured settlement will often be complicated by the fact that the attorneys who represented the recipient will likely want to be paid today, not in installments over the life of the structured settlement. Those contingencies will likely have to be considered and accounted for.

Structured settlements are not the right solution for everybody, but many parties to lawsuits discover that they are a way to keep everybody happiest. If you are considering entering into one, either as the payer or the recipient, consult a qualified attorney to see if the terms of the agreement will be right for you.

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