What Is a Structured Settlement?

Rebecca Parson
Rebecca Parson

Rebecca Parson

Author

Rebecca Parson is a financial and tech writer with 10 years of experience writing about topics such as life insurance, commodities investing, and the SaaS industry. She has a master’s degree from Johns Hopkins University and a bachelor’s degree from the University of Mary Washington. Her writing has appeared at money.com, sacbee.com, cart.com, herodevs.com, blanchardgold.com, and more.

Brian OConnel
Brian OConnel

Brian O'Connel

Contributor

Brian O’Connell has been a contributing writer for U.S News & World Report since 2016. A former Wall Street bond trader and the author of two best-selling books; “The 401k Millionaire” and “CNBC’s Creating Wealth”, he has 20 years experience covering business news and trends, particularly in the business and financial sectors. He believes education is the best gift a financial consumer can receive – and brings that philosophy to every story he writes. His byline has appeared in dozens of top-tier national business publications, including CBS News, Bloomberg, Time, MSN Money, The Wall Street Journal, CNBC, TheStreet.com, Yahoo Finance, CBS Marketwatch, and many more.

By Rebecca Parson, Brian O'Connel
Author, Contributor, Life Insurance

structured settlement is a legal settlement that lets someone receive compensation over time through regular payments. It usually results from a lawsuit.

U.S. lawsuits ending in structured settlements are at an all-time high, with paid premiums of $8.6 billion in 2023. Plaintiffs are increasingly attracted to structured settlements (instead of lump sums) because of the predictable payments over time and tax benefits.

History of Structured Settlements 

Structured settlements date back to Canada in the 1960s when a medicinal drug known as thalidomide triggered birth defects in thousands of children. Instead of accepting a lump sum payment from the pharmaceutical company after their legal victory, parents and guardians opted for a series of annuity-like payments over an extended period. This helped pay their ongoing medical bills.

In the 1970s, the U.S. Internal Revenue Service issued Revenue Ruling 79-220, which provided tax benefits for successful legal claimants. The ruling noted that “structured” settlement payments didn’t have to be included in a recipient’s gross income. Thus, no taxes were levied on settlement funds received.

In the 1980s, the U.S. Congress enacted the Periodic Payment Settlement Act of 1982, which barred state governments from levying taxes on structured settlements from personal injury legal cases. 

While Congress tinkered with structured settlements in the ensuing decades, structured settlements kept their tax-advantaged status. Today, they remain a pervasive and trusted plaintiff payment source, with an estimated $10 billion in payments by structured settlement providers.

Structured Settlement Pros and Cons

Consult with a lawyer, financial planner, and structured settlement specialist before signing the dotted line. A trusted structured settlement expert can lay a payment foundation that considers risks and protects your short-term and long-term financial plan.

Benefits

Structured settlements are widely used as payouts for personal injury settlements and provide regular, dependable financial payments tax-free.

Once approved by a court of law, claimants receive a steady stream of structured settlement payments, which they can use to settle medical bills, pay for household budget costs, and gain added retirement financial security.

On the payer’s end, structured settlements can help parties by not having to pay a big legal settlement all at once. This can help payers better manage cash flow and budgeting issues.

Risks

Structured settlements involve some risks, including:

  • Lack of flexibility: In most instances, once a structured settlement is established, you can’t change the terms.
  • Inflation: With inflation currently operating at historically higher levels, structured settlement recipients often see their fixed payments erode in value over the long haul.
  • Lack of funds for larger needs: If a claimant doesn’t specifically include a lump-sum payment element in a structured settlement, those smaller, regular payments may not be enough to cover a large financial emergency.
  • Insolvency risk: While unlikely, there is a chance the insurance company handling the structured settlements becomes insolvent and goes out of business. That scenario could negatively impact regular payments if a settlement deal doesn’t address this possibility.

Structured Settlements: Payment Options

Once a deal is struck, the at-fault party sets up payment via an annuity — steady, guaranteed payments over a defined period. There are different ways to structure this depending on what the recipient needs, including:

  • Lump-sum distributions: This option allows a percentage of a structured settlement to be paid upfront, with the remainder paid over a regularly scheduled time.
  • Deferred payments: This type of structured settlement is paid after a defined period of time has passed. For example, the claimant may ask for a deferred payment to optimize his or her retirement income strategy.
  • Life-contingent payments: These are paid for the duration of the claimant’s life and stop after the claimant dies.
  • Increasing/decreasing payments: This is a payment plan where the amount paid periodically rises or falls over time.
  • Joint and survivor annuity: This type of annuity keeps providing payments to a surviving spouse or other beneficiary after the initial annuitant passes away. 

What Triggers Structured Settlements?

Structure settlements are typically set into motion after agreements between parties on the following legal matters:

  • A personal injury lawsuit because someone has harmed another person.
  • A worker’s compensation suit where the recipient often uses the funds to replace lost wages.
  • A medical malpractice settlement occurs when a physician or other medical entity injures or kills a patient due to negligence.
  • A wrongful death claim in which the deceased’s beneficiaries are paid out, thus enabling them to cover future expenses. 

How Structured Settlements Work

Key structured settlement negotiation points include:

  • What will the payments total? 
  • How many payments will the plaintiff get?
  • Are the payments fixed, or can they escalate over time?
  • Will any supplemental payments be made to the recipient?

The Structured Settlement Process

Here’s a step-by-step look at how structured settlements work:

  1. The claimant (the injured party) files a legal action against the defendant, claiming irreparable harm from an injury or wrongful death caused by the defendant.
  2. If a court ruling goes against the defendant, or if the matter is settled outside of a courtroom, the two parties may agree to a structured settlement as a mechanism for payment settlement.
  3. In conjunction with an insurance company, the defendant works with a qualified assignment company to handle the annuity payments and pay the recipient on the agreed-upon schedule.
  4. The assignment company, which assumes the payment obligation to the recipient, purchases a structured settlement from a life insurance firm and begins making regular payments to the beneficiary for the duration of the structured settlement contract. 

How is a Structured Settlement Different from a Life Settlement?

A structured settlement is when you get regular payments over time because of a lawsuit. A life settlement is when you get cash from selling your life insurance.

With a life settlement, the buyer pays you for your policy and takes over paying the premiums. The buyer pays you more than you’d get by surrendering your policy to the life insurance company — they’re counting on the death benefit later being more than what they paid in premiums and to you.

With a structured settlement, the claimant settles a personal injury tort claim or lawsuit by receiving periodic payments on an agreed schedule instead of accepting a lump sum payout.

Structured Settlement Considerations 

When talking to trusted legal and financial advisors, consider the following:

  • Public assistance payouts: If you receive any public financial assistance, such as Medicare or Medicaid, find out how a payout might impact them. Additional income could put those programs at risk.
  • Power of attorney: Know that your structured settlement buyer may have limited power of attorney and can use that power to review medical records if and when needed.
  • Your financial needs: Don’t start negotiating a structured settlement plan until you know your immediate financial obligations, current medical costs, household income and budget, and long-term financial objectives. Having these figures in place gives you a good idea of how to design a structured settlement that aligns with your financial picture.

Before you start negotiating a structured settlement deal, get advice from a financial advisor, an experienced civil litigation attorney, and a structured settlement specialist. Each can walk you through the negotiation process and offer professional instruction on designing the best-structured settlement that maximizes your interests, goals, and risk-management levels.

FAQs About Structured Settlements

Are There Taxes on Structured Settlements?

No, there are no taxes on structured settlements.

Is a Structured Settlement Life Insurance?

No, a structured settlement is not life insurance. It’s a way to settle a personal injury, wrongful death, or workers’ compensation claim, among others.

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