A structured settlement is a regular stream of payments granted to the plaintiff in a civil lawsuit. Structured settlements guarantee lifetime income for the injured party.
What Is a Structured Settlement
Structured settlements are simple. Many lawsuits result in someone or some company paying money to another to right a wrong. Those responsible for the wrong may agree to the settlement on their own, or they may be forced to pay the money when they lose the case in court.
If the amount of money is small enough, the wronged party may have the option to receive a lump sum settlement. For larger sums, however, a structured settlement annuity may be arranged.
In this case, the at-fault party puts the money toward an annuity, which is a financial product that guarantees regular payments over time from an insurance company.
The agreement details the series of payments the person who was wronged will receive as compensation for the harm done to them. Spreading the money over a longer period of time offers a better future guarantee of financial security because a single payout can be spent quickly.
Structured settlements gained popularity in the 1980s after the U.S. Congress passed the Periodic Payment Settlement Act. According to the National Structured Settlements Trade Association, almost $6 billion in new structured settlements are issued annually.
How Do Structured Settlements Work? A structured settlement pays out money owed from a legal settlement through periodic payments in the form of a financial product known as an annuity. However, many legal settlements offer a lump-sum payment option, which provides a one-time sum of money. The key differences between both annuity settlement options are the long-term security and the taxes. For example, money received from a personal injury case is almost always tax free when you receive it. However, once the money is yours, you’re liable for taxes and dividends from the lump sum.
There are a number of reasons why an individual may receive a structured settlement.
The most common cases are:
A personal injury case is a civil case where someone who’s been harmed files a lawsuit seeking money from the person believed responsible for the harm. Money in the form of a structured settlement helps recipient pay for medical expenses or other costs.
Most people know about workers’ compensation, which pays workers who get injured on the job while they recover. Payments can be used for medical treatment and wage replacement during periods when injured employees are unable to work and other expenses.
In some unfortunate cases, doctors can do more harm than good. In this instance, injured patients or the families of deceased patients can sue for medical malpractice.
A structured settlement is also a common way to compensate family members who claim loved ones were victims of wrongful deaths. Families may be entitled to receive a stream of tax-free payments, to replace income after a loved one’s death.
Structured settlements — or structured annuities — are both financial products and legal judgments. While they function somewhat like private assets, they are also subject to complex regulations.
Learn about the process of being awarded a structured settlement annuity as well as the legal protections and advantages on the following pages:
Structured Settlement Payout Options
Compare and contrast the different ways to accept a cash settlement from a lawsuit.
Government Support for Structured Settlements
Learn about how the government uses the tax code to promote their use.
Structured Settlements for Minors
Read about why this type of settlement is typically used in cases involving children.
Payout Options for Structured Settlements
If you elect to receive your lawsuit payout through a structured settlement, you can determine whether to begin to receive the funds immediately or at a later date. Immediate payments can be beneficial if you require medical care, for example, or have lost your source of income. You may decide to postpone the payments until a later time, such as after you retire. During the waiting period, the annuity will grow as it earns interest.
You can also determine whether the annuity should be paid for the rest of your life, no matter how long that may be, or for a specified number of years.
You can also determine when you set up the annuity the schedule for receiving payments and whether the payments should go up or down over time.
Structured Settlement Pros and Cons
Structured annuities are ideally suited for many different types of cases. For additional information on how work, payout options, or how to access your cash ahead of the annuity contract schedule, the Structured Settlements FAQs page can be a beneficial resource.
These scheduled payments offer a number of advantages. When deciding on any financial investment, it is important to understand the benefits along with the risks.
Pros of Structured Settlements
Payments are tax-free. In the event of the recipient’s death, the heir can continue to receive tax-free payments. Payments can be scheduled for almost any length of time and can begin immediately or be deferred for as many years as requested. They can include future lump-sum payouts or benefit increases.
Spreading out payments over time can reduce the temptation to make large, extravagant purchases and guarantees future income. This is especially helpful if the recipient has a medical condition that will require long-term care.
Unlike stocks, bonds and mutual funds, structured settlements do not fluctuate with market changes. Payments are guaranteed by the insurance company that issued the annuity.
A structured settlement often yields, in total, more than a lump-sum payout would because of the interest your annuity may earn over time.
Cons of Structured Settlements
Once terms are finalized, there’s little you can do to alter them if they do not meet your needs. You cannot renegotiate the terms if your financial situation or the overall economy changes.
Funds are not immediately accessible in case of an emergency, and the recipient cannot place a lump-sum payout in other investments that carry higher rates of return.
Tapping into your structured settlement without selling payments will cost you money. You will pay surrender charges and IRS penalties if you withdraw funds before age 59½.
Some parts of a settlement, such as attorney’s fees and punitive damages, can be taxed.
Not all states require insurance companies to disclose their costs to establish a structured settlement or lump-sum annuity. Without this information, a recipient could lose a significant amount of money through administrative fees.
Options for Annuity Owners to Sell Payments
You should carefully consider the terms of your annuity because they can’t be renegotiated after the contract has been issued. That can limit your options if your financial situation changes due unemployment, illnesses or other setbacks.
However, annuity owners may have the option to get cash in advance of their contract schedules. Owners may sell some or all payments to structured settlement buyers. Some buyers may inaccurately refer to these sales as “structured settlement loans.” In reality, they are actually purchasing your settlement, which will effectively halt your regular payments. Such sales must be approved by a judge. The role of the judge is to decide if the sale is in the best interest of the annuity owner.
Other rules may apply depending on the details of your annuity contract and the laws of the state where you live. The Structured Settlement Protection Act of 2002 provides federal guidelines on such transactions.
Annuity owners should carefully consider their options before selling payments. You can learn more at Selling Structured Settlement Payments.
Topics include: The secondary annuity market Key considerations and requirements Selling payments for minors