Cash Settlement

2007-03-08 10:33:40

( Financial )



A cash settlement refers to a transaction involving the payment of cash, instead of physical delivery of a commodity. A cash settlement is also an insurance term referring to the payment of the face amount of the policy

Contracts Involving Cash Settlements
A cash settlement is used to extinguish liabilities for contracts where the subject matter of the contract may be incapable of physical delivery. For instance, a contract involving the future purchase of stocks may be settled in cash, when those stocks are incapable of delivery. That transaction is called a cash settlement. Another example is an option contract, where the option to buy commodities is purchased. If for some reason the commodities become impossible to deliver, the parties may choose a cash settlement.

Cash Settlements and Money Market Investments
Cash settlements occur in great number due to the sheer volume of money market investments. A contract involving future purchase of stocks or bonds, is called a future. The purchase of these contracts is a zero-sum game, where your gains depend entirely on someone else's losses. The subject of a future contract is often not capable of physical delivery. Cash must therefore be paid, and the payment of the proceeds of that contract is called a cash settlement.

Cash Settlements in Insurance
In insurance contracts the owner of the policy often instructs how the proceeds are to be distributed. Sometimes, the proceeds are given slowly, in the form of periodic income. In fact, periodic income is a favored option in America today. Many people instruct their insurers to grant a periodic income for their families in the event of injury or death. However, should the beneficiary wish that all the proceeds of insurance be handed over, a full cash settlement is necessary. This simply involves full payment of the face amount of the policy.


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