Cash Settlement
What Does Cash Settlement Mean?
A cash settlement is a financial transaction in which one party pays actual money to another, rather than compensating them with a commodity like stocks. Many insurance claims can be settled in cash instead of other forms of compensation, such as repairs.
Cash settlements are considered superior to most other types of settlements due to their liquidity and convenience, especially when compared to financial instruments and investment vehicles.
Insuranceopedia Explains Cash Settlement
Cash settlements are not always the better option, as they expose the recipient to potential collection and garnishment by other interested parties.
For example, suppose you own a home but still owe $100,000 on the mortgage. If the house suffers significant damage from a wildfire, the insurance company can either rebuild the damaged portions of the home or offer a cash settlement. However, if you choose the cash settlement, your mortgage lender may be entitled to claim a portion of it. On the other hand, if you opt for the insurance company to hire contractors to rebuild the damaged parts of your home, you can benefit from the repairs without losing any of the settlement to the lender.
