Should a severely injured victim of an accident take a $1 million lump-sum payment or $200,000 in immediate cash plus $25,000 a year for life? We also wrote this: Businesslike Management of Family Spending.
As large awards become more frequent, insurance companies are seeking less costly alternatives. One of the cheaper alternatives is the structured settlement: A package of upfront cash and monthly income. It is offered to an accident victim before the case goes to trial if the insurer's lawyers believe it is likely that the victim will win a large award.
Insurers save money
Structured settlements generally cost casualty underwriters 20% to 60% less than lump-sum settlements. The package: The up-front cash may be used for medical bills, legal fees, a reserve fund, lost income, and specific needs (such as a specially designed house for a paraplegic).
The scheduled income may be for a specific period or for life. It may be designed to increase or decrease on given future dates or at the occurrence of certain events. All aspects are negotiable.
Caution
This type of settlement can look attractive to the injured party (and advisers), but it may not be the wisest choice. Litigation can be protected, but if a plaintiff has a strong case the insurer strives to settle quickly. It is axiomatic that the longer the delay in such a case the larger the settlement. The structured settlement was designed as an expeditious, less costly pretrial settlement device.
However, it would not be offered if the plaintiff had a weak case. In that instance, though the insurer would be likely to win in court, it might first offer a small settlement that would be less costly than litigation.
Insurance companies sell the Guaranteeing income for life. settlement by:
- Protecting minors and incompetents from inadequate or unscrupulous advisers and dishonest outsiders.
- Matching benefits to the individual's needs reduces the risk of financial mismanagement. Getting the plaintiff's lawyer paid immediately, or in installments over years.
Arguments against the idea
The guaranteed income is vulnerable to erosion by inflation. Contrast: A $1 million lump sum settlement is reduced by immediate expenses to $750,000. That sum could safely yield an annual income of $60,000 to $75,000, leaving the principal intact. Or: It could buy an annuity that provides a considerably greater lifetime income than the $25,000 settlement figure noted above.
The courts are empowered to protect minors and incompetents. With a large lump sum settlement, the court could direct the purchase of an annuity or the establishment of a trust, limiting it to specific types of investments and appointing a reputable counselor as trustee. Either way, the accident victim has the greater assurance of continued financial security than under the restriction of a structured settlement.
Accident victims who win lump-sum settlements have a better opportunity to set up an adequate estate program for their survivors. Also check this post: The Lure of Easy Bankruptcy.
Bottom line
If a structured settlement is accepted, it should be made inflation-proof by including an escalation clause, which could be tied to the cost of living index.
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