These payments may be scheduled for any length of time -- even as long as the claimant's lifetime -- and are structured to meet the financial needs of the claimant. Payments can be in equal amounts or can vary. They may include future lump sums.
A structured settlement arrangement may be agreed to privately, as in a pre-trial settlement, or it may be required by a court order, as in a settlement or judgment involving a minor.
A structured settlement is a proven, effective solution for the needs of personal injury claimants. Claims professionals, plaintiff attorneys, judges and defense attorneys advocate the use of structured settlements because they can effectively meet a claimant's needs for security, and provide more benefits over time than a single, lump sum settlement because of applicable tax rates.
Historically, damages paid because of a personal injury lawsuit came in the form of a lump sum at the time of settlement or judgment. This kind of payment, especially in large catastrophic injury cases, places the claimant (or the family) in the position of managing a large sum of money, which is intended to provide for a lifetime of medical, and income needs.
Since most people are not experienced in handling large sums, there is always the danger that the money will be spent quickly or invested unwisely, leaving little or nothing to cover future needs of a seriously injured person. Indeed, anecdotal evidence suggests that many claimants who receive lump sum awards dissipate their assets and are left with unmet needs within a relatively short period of time.
Thus, structured settlements were developed to create a more stable financial basis for the claimant.
The defendant agrees with the victim on a stream of periodic damage payments tailored to the victim's particular medical care and basic living and family needs. The defendant then assigns its periodic payment obligation to a life insurance company, which funds the victim's damage payments with an annuity. In some instances, the defendant retains the periodic payment liability and purchases as annuity to fund the payments to the victim.
Annuity contracts have been the preferred way of funding because of their pricing and flexibility for settlement design. An alternative is a trust fund, which invests only in United States Treasury obligations. These trusts add the safety of investment in obligations issued by the U.S. Government.