How Are Medical Malpractice Settlements Structured?

You may have the option to have your settlement paid in a lump sum or structured payments. Here are the pros and cons.

If a person offered to give you either $1,000 now or $1,000 one year from now, which would you take? The obvious answer is to take the $1,000 now. Current money is more valuable than future money. You can use the money over the course of the next year if you receive it now. Inflation might reduce its value before next year. There is also a risk that you will not receive the money at all in one year. The person might not have it anymore, or they might refuse to give it to you.

Similar considerations come into play when a patient must decide between a structured settlement and a lump sum payment after a successful medical malpractice claim or lawsuit.

This article will identify some key implications of both payment options, and also provide examples of what each option might look like in a given medical malpractice case.

Calculating Present Value of a Structured Settlement

Comparing a structured settlement to a lump sum payment is a little bit like comparing apples to oranges. Money received in the future is less valuable than money received now. In order to make the comparison closer to an "apples-to-apples" one, you have to determine the value of the future payments in terms of today’s money.

Personalized Present Value

The tricky part about determining the current value of future payments is that the answer is different for everyone. How much would you pay today in order to receive $1,000 in one year? There is no right or wrong answer to that question. Some people who feel fairly comfortable with money might be willing to pay as much as $990. Other people who might have more of a desire to use money immediately might not be willing to pay more than $900.

Likelihood of Nonpayment

If you accept a structured settlement, there is a chance, however small, that the company paying the money will either stop paying or enter bankruptcy, which would make it difficult to collect the money. In most medical malpractice situations, these scenarios are unlikely (your payment will likely come from a pretty well-established insurance carrier, and in most cases will be tied to a court-ordered judgment) but the possibility should still be taken into account.

If you wanted to do the math, and you were to assign a likelihood of nonpayment actually happening in any given year -- say your structured settlement would last 10 years -- you might start with a 0.1% chance of nonpayment, but feel free to adjust that number if you believe the likelihood of nonpayment is higher or lower under the circumstances of your case.

Also, even in the event of a refusal to pay or a bankruptcy, you will have some options (you could recover some of the money in bankruptcy court or sue the company for a refusal to pay).

Inflation

In weighing the options of a lump sum payment versus a structured settlement, you should always consider the impact of inflation. While it's impossible to predict with much certainty, you might use a figure of 2.5%, which is a relatively standard level.

Amount Received Immediately

In most cases, if you agree to a 10-year structured settlement, you will receive eleven annual payments. You receive the first payment immediately, and one payment at the end of each year until year 10. That's just one more thing to consider in terms of the total amount of your structured settlement and the number of years it will be spread over. Since medical malpractice cases may take years to settle, most people prefer to go the lump-sum route and put the case behind them.

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