What Is A Structured Settlement? (2024)

Key Takeaways

• A structured settlement means the plaintiff gets a series of payments over time rather than a single lump-sum payment.
• The defendant can purchase an annuity from an insurance company to pay the structured settlement.

A structured settlement is an alternative to a lump sum payment awarded by the court following a lawsuit.

Instead of receiving money up front, plaintiffs receive a series of payments over time if they select a structured settlement. This can help injured victims avoid the complications associated with a single large payment and enable them to receive guaranteed income over time to help cover costs.

How Do You Get a Structured Settlement?

Structured settlements occur only in lawsuits that are settled. The plaintiff and the defendant negotiate a mutually agreeable settlement. The plaintiff can request that the funds be made available as a structured settlement or the defendant may make the offer.

Both parties must agree to the terms. The settlement is submitted to the court for approval and becomes effective once the judgment is signed by the court.

The plaintiff and defendant will need to agree on the terms of the structured settlement, including when and how money will be paid out and how long the payments will last. The defendant will then make periodic payments according to the agreed-upon terms or will purchase an annuity from an insurance company that makes the agreed-upon payments.

The plaintiff then receives payments according to the terms of the settlement or the annuity. This provides guaranteed income or compensation to the plaintiff and fully resolves the lawsuit.

Types of Structured Settlement Cases

Structured settlements can be available in any type of legal case where a plaintiff is awarded damages by a defendant. Some of the different types of cases where a structured settlement may be appropriate include:

• Personal injury
• Medical malpractice
• Workers’ compensation
• Discrimination
• Large-scale group sexual abuse/molestation
• Wrongful death

An experienced attorney can provide insight into whether a structured settlement could be an available option as a way to resolve a claim.

Typically, the structured settlement process works as follows:

• An accident victim pursues a claim against a defendant that is settled.
• The parties agree on compensation as a structured settlement.
• The plaintiff releases the defendant from further liability as part of the settlement agreement.
• The defendant funds the settlement.
• If the defendant purchases an annuity from a life insurance company, it will begin making payments.

In most cases, it is best for both the plaintiff and defendant if the defendant purchases an annuity from an insurance company. The plaintiff benefits by not having to rely on the continued financial viability of the defendant. And the defendant benefits from getting this ongoing obligation off their books and being able to move on.

Payout Options for Structured Settlements

Structured settlements can be arranged in different ways depending on a plaintiff’s payment needs and depending on the agreement with the defendant. Some common arrangements for structured settlements include the following:

• Large initial payment followed by smaller periodic payments. If accident victims have accrued substantial expenses, such as large medical bills, they may arrange a structured settlement with a large lump sum payment up front and then smaller periodic payments later.
• Increasing payments. Some structured settlements will start out with smaller payments and the amount of money paid out will increase over time.
• Decreasing payments. Other structured settlements will do the reverse, starting out larger and then reducing in amount as needs decrease over time.
• Delayed payments. Sometimes, plaintiffs will want to defer the receipt of settlement money until later in life. This enables payments to start at a designated time.
• Additional payouts for extraordinary expenses. In some cases, a structured settlement will pay out a specific amount of money on a set schedule but will allow for additional payments to be made to cover unusual expenses.

The right type of structured settlement will depend on the reason for the settlement, the extent of damage suffered and the way the funds will be used. For example, if a plaintiff sustained injuries that will become more debilitating over time, a structured settlement with increasing payments could be a better choice. But if a victim is expected to slowly recover from injuries over time, then decreasing payments may be the better option.

How Long Does a Structured Settlement Last?

The timeline for a structured settlement depends on the initial arrangement with the defendant and, if applicable, with an assignee. These settlements are often, but not always, guaranteed to last for life. Sometimes, a death benefit is also paid out to surviving loved ones. Other structured settlements will last only for a limited period of time, such as 10 or 20 years.

Taxation of Structured Settlements

If a plaintiff receives compensation for physical personal injury, generally the settlement is tax-exempt if the settlement is for:

• Physical injuries or sickness (except for medical expenses that were deducted on the plaintiff’s taxes)
• Mental anguish or emotional distress related to a physical injury or sickness (if not related, it is taxable)
• Discrimination that does not include lost wages
• Lost property value if the settlement is less than or equal to the basis of the property

While the money from the settlement is tax-exempt, if the plaintiff invests the money from the settlement, interest earned could be taxed. However, the rules are different for plaintiffs who receive a structured settlement as an annuity. The principal and interest received are generally tax-exempt in this situation.

Punitive damages are not tax-exempt, however. Money received for punitive damages will be taxed as income.

There are both advantages and disadvantages to structured settlements. Here are some of the biggest advantages:

• Structured settlements provide a continuous stream of tax-free income. Payees will not need to worry about owing the IRS or their state any money from the settlement.
• Structured settlements are flexible. Plaintiffs can arrange a payment schedule that meets their needs.
• Structured settlements can last for life. In some cases, plaintiffs can arrange to ensure the settlement provides income for the remainder of their life so they don’t have to worry about running out of money.
• Structured settlements can be used to provide for loved ones. Some settlements have a death benefit, or the payouts can continue to loved ones if the plaintiff passes away prematurely.
• Structured settlements can make money management easier. Accident victims don’t need to worry about figuring out how to successfully manage and invest a large sum of money or about having to say no to loved ones who ask for handouts.

There are also some drawbacks to structured settlements:

• Accident victims are locked into the settlement terms. If it turns out they need more money up front or the settlement otherwise doesn’t meet their needs, they cannot change the terms later.
• There’s less flexibility in when and how victims access their money. Payees cannot access funds whenever they want them.
• There may be high administrative fees. If insurers managing the settlements charge a substantial amount, victims could lose some of their money.
• Structured settlement payments may impact eligibility for means-tested benefits. They will not affect the victim’s ability to qualify for Social Security Disability, income-based Medicaid, or other government assistance, but they may need to be structured as a special needs trust.

An experienced personal injury attorney can help accident victims weigh the pros and cons and decide if a structured settlement is the right choice.