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Math Help - Structured Settlement Vs. Lump Sum Settlement

  1. #1
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    Structured Settlement Vs. Lump Sum Settlement

    Here is the question: There is a person who has worked with asbestos for a large construction company and has contracted Pleural Mesothelioma. The person is entitled to a large settlement from this company but how could that person decide which of the following two options is better? What is the information needed in order to make a sound decision:

    1. One lump sum settlement.
    2. A structured Settlement.

    Under a structured settlement, an injury victim doesn't receive compensation for his or her injuries in one lump sum. Rather, he will receive a stream of tax-free payments tailored to meet future medical expenses and basic living needs.

    Let us say that one lump sum settlement is 'S' and that the structured settlement payments are 'P' once a year. If the person is likely to live for 'X' amount of years. What would the equation be to determine which choice is more financially sound?

    Thanks for any help.
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  2. #2
    hpe
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    There isn't enough information to answer this question. What is also needed is the interest rate (e.g. a money market rate that the person in question could collect if the lump sum were put into a bank account) for the x years that the person is is expected to live. Let's assume that the interest rate is i (in fractions of 1, so 5% means i=0.05), fixed , and that the person will die in year x after the agreement goes into force, also fixed. Also assume that the structured settlement payments are made at the beginning of each year. The structured settlement is favorable if
    <br />
P \frac{1-(1-i)^x}{i} > S<br />
    Of course the assumptions of constant interest rate and fixed life expectancy are unrealistic. Actuarial models exist that allow a company selling term insurance to compare the two (this is after all almost the same thing!), but an individual has a different viewpoint, since he is not interested in coming out ahead on average for a large number of life insurance policies, but rather in coming out ahead with large probability.
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  3. #3
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    Pleural Mesothelioma Structured Settlement Calculation

    Thank you. This is a great help to try and run some scenarios.
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