What Does Cash Settlement Mean?
A cash settlement is a financial transaction in which one party pays actual money to another party, as opposed to compensating them with a commodity such as stocks. Many insurance claims can be paid in cash in lieu of other forms of compensation, such as repairs.
Cash settlements are considered superior to most other forms of settlements because of its liquidity and convenience when compared to financial instruments and investments vehicles.
Insuranceopedia Explains Cash Settlement
Cash settlements are not always the better option, since it opens the recipient to collection and garnishing from other interested parties.
For instance, suppose you own a home but still owe $100,000 on the mortgage. The house experiences some significant damage due to a wildfire. The insurance company can either rebuild the damaged portions of the home or you can accept a cash settlement instead. If you choose the cash settlement, however, your mortgage lender may be entitled to collect a portion of it. If, on the other hand, you opted to have the insurance company hire contractors to rebuild the damaged portions of your home, you would get the benefits of the repairs without losing any of the settlement to the lender.