Structured Settlement Annuities

A structured settlement is a type of annuity that pays out an award from a civil lawsuit by spreading the payments out over a long period of time. A structured settlement offers a better future guarantee of money than a single lump-sum payout, which can be spent quickly.

What Is a Structured Settlement?

Despite all the legal language around them, 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 settlement is small enough, the wronged party may have the option to receive a lump sum settlement. For larger settlements, 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 structured settlement agreement details the series of payments the person who was wronged will receive as compensation for the harm done to them. Structuring 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.

Frequently Asked Questions: Get straightforward answers to common questions about a structured settlement annuity.

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 being:

  • Personal Injury: 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.
  • Workers’ Compensation: Most people know about workers compensation, which pays out 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.
  • Medical Malpractice: 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.
  • Wrongful Death: A structured settlement is also a common way to compensate the family of someone whose death was the subject of a wrongful death claim. Families may be entitled to receive a stream of tax free payments, to replace the loss of income previously earned by the lost loved one.

Structured settlements — or structured annuities — are both financial products and legal judgements. 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 given to structured settlement recipients through the following pages:

Structured Settlement Pros and Cons

Structured annuities are ideally suited for many different types of cases. However, once the terms are in place, they cannot be changed. For additional information on how structured settlements work, payout options, or how to access your cash award ahead of the annuity contract schedule, the Structured Settlements FAQs page can be a beneficial resource within your search.

There are a number of advantages from receiving structured settlement payments. When deciding on any financial investment, it is important to understand the benefits along with the risks.

Pros

  • Structured settlement payments are tax-free.
  • In the event of the recipient’s premature death, the contract’s designated heir can continue to receive any future guaranteed 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 are not dependent on fluctuations of financial markets. 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

  • 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 invest the 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 from their settlement through administrative fees.

Selling Your Structured Settlement Payments

Selling Structured Settlement Payments: Find out how structured settlement recipients can access their cash award ahead of the annuity contract schedule. Learn more about topics like:

  • What Is the Secondary Annuity Market?
  • Key Considerations and Requirements
  • Selling Payments on Behalf of Minors

Interested in Selling Your Payments?

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Page Sources

  1. Fazio, W. B. (2010, June 7). Structured settlements 101. Retrieved from https://www.lexisnexis.com/legalnewsroom/workers-compensation/b/workers-compensation-law-blog/archive/2010/06/07/structured-settlements-101.aspx
  2. Surana, R. (2016, February 25). Pros and cons of structured settlement annuities. Retrieved from https://www.law360.com/articles/763833/pros-and-cons-of-structured-settlement-annuities
  3. Wood, R. W. (2010, October 26). What's a 'structured settlement'? Retrieved from https://www.forbes.com/sites/robertwood/2010/10/26/whats-a-structured-settlement/#151438c44422
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