Frank is on his way to work early one morning and gets into a terrible accident. He is severely hurt and spends time in the hospital and later finds that the accident was due to someone's negligence. After speaking with a lawyer, Frank and his family decide to sue the person or, specifically, the insurance company, for compensation. After going through the motions of the lawsuit, Frank decides to settle with the insurance company by using a structured settlement.

A structured settlement is used by insurance companies to settle a variety of claims, ranging from small to very large in size. What happens is the insurance company offers to pay the claim over a period of time through payment installments. The insurance company buys an annuity that guarantees the payments will be made. The insurance company maintains ownership of the annuity and the claimant only has the rights to the payments.

Often the total of the payments are more than what the insurance company offers in a lump sum settlement. This gives the claimant an idea that the structured settlement is worth more than a lump sum. The guaranteed payments may be a very attractive benefit for the claimant as well. In reality, structured settlements are designed to benefit the insurance company, not the person who receives the settlement.

The offer of more money over time instead of an immediate lump sum looks like a good deal at first. If the payments are stretched out over an extended period of time, 10 years or more, they will lose value to rising inflation. Structured settlements benefit insurance companies, as they may be able to be funded with a lower amount of initial investment than the lump sum. This works because the annuity that funds the settlement earns an investment return that compounds over time.

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