Structured Settlements Explained

Most structured settlements start with a civil lawsuit. When the plaintiff wins and is awarded monetary compensation, the defendant typically can’t pay the full amount out of pocket. Instead, they work with an insurance company to purchase an annuity that spreads out the payments over time. That’s the money you receive, often as fixed payments, when you win a structured settlement. 

Types of Structured Settlement Payouts 

The judge who presides over your lawsuit typically decides how the payout is structured depending on the damage and the type of financial needs you’re likely to have in the years ahead. 

There is, however, a lot of flexibility to tailor payments to your individual needs. With the help of your lawyer, you may be able to negotiate payment frequency, adjust the value of each payment, and decide whether to start receiving the funds immediately or delay them.

In addition to a set payment schedule, here are some other structures you might see:

Lump sum with smaller ongoing payments: In some cases, you may receive one large payment at the beginning of your structured settlement, followed by smaller ongoing ones as time goes by. This is common if your lawsuit involves an injury or other issue requiring medical care. The idea is to give you more funds upfront to cover healthcare expenses.

Scaled up payments: Another payout structure is to receive smaller payments at first, which then increase over time. This arrangement may be used if damages such as an injury are expected to get worse over time. 

Scaled down payments: If you’re expected to heal or not need as much funds in the future, you may receive a structured settlement with payments that decrease over time. 

Extra payments: Another option is to receive set payments made periodically, in addition to extra payments that may be needed for extraordinary expenses. For instance, a minor who receives a structured settlement may get payments scheduled to pay for college tuition when the time comes.

Delayed payments: In some instances, you might prefer to delay payments until you reach retirement age. If you don’t have specific, extra financial needs at the time of your lawsuit, this could be an option to help you comfortably retire. 

Pros of a Structured Settlement

Receiving a structured settlement comes with many financial advantages.

  • Enjoy tax-free income and better financial stability
  • Earn interest in your annuity account
  • Replace lost income
  • Name a beneficiary to receive the payments after the original beneficiary’s death
  • Unlike investments, structured settlement payments are not linked to the economy or stock market
  • Easier to manage ongoing payments instead of a lump sum

Cons of a Structured Settlement

Pay attention to the potential drawbacks of a structured settlement as well.

  • Minimal flexibility from the original terms of the structured settlement
  • Monthly payments are not well suited as an emergency fund
  • Earned interest is not as aggressive over time as other potential investments
  • Selling your structured settlement for a lump sum is possible, but you won’t receive the full value from the purchasing company

Structured Settlement Annuities: Popular Issuers

These are some of the largest insurance companies in the U.S. that issue structured settlement annuities.

  • AIG
  • Allstate
  • Berkshire Hathaway
  • Liberty Mutual
  • Metlife
  • Mutual of Omaha
  • New York Life
  • Pacific Life
  • Prudential Financial
  • Symetra
  • USB Financial

What are the taxes on a structured settlement?

In most cases, structured settlements resulting from a civil lawsuit do not count as income and are therefore not taxed. The federal government made this official in the Periodic Payment Settlement Act of 1982. However, if your annuity earns interest, then the interest portion of future payments could be subject to tax. 

How does a death benefit work?

Some structured settlements include a death benefit provision for guaranteed payments. That means if the original beneficiary dies before the structured settlement is paid in full, the payments pass onto a named beneficiary. Just like the original payments, the money is exempt from income tax (except, typically, earned interest). However, the settlement is included as part of the deceased individual’s estate. If those assets exceed the estate tax exemption, the estate may need to pay taxes on part of the assets. 

Common Structured Settlement Cases  

A structured settlement may be awarded in several types of civil lawsuits, including the following. 

Personal Injury

A personal injury lawsuit can stem from a variety of injuries, such as slips and falls, car accidents, and dog bites. A structured settlement may be awarded to cover medical bills and/or lost income. 

Medical Malpractice

A medical malpractice suit seeks damages caused by a doctor’s negligence. The lawsuit must prove that there was a violation of the standard of care, that the negligence caused an injury, and that significant damages occurred. 

Worker’s Comp

Getting hurt on the job could entitle you to worker’s compensation. Common issues include strains, sprains, cuts, and repetitive stress injuries. Most employers have worker’s comp insurance to cover the cost of potential job-related injuries. 

Wrongful Death

Wrongful death lawsuits overlap with other areas and can include personal injury, medical malpractice, and work-related accidents. Criminal acts resulting in the death of an individual also fall into this category. 

Discrimination

Discrimination lawsuits often occur from events in the workplace. The most common forms include age, racial, and gender discrimination. 

How Does a Structured Settlement Work for Minors?

There are usually additional restrictions placed on structured settlements awarded to minors. Parents or guardians are in charge of the settlement until the minor comes of age. However, even they have limitations imposed by the judge to ensure the money is used in an appropriate manner. 

It’s also more difficult to see a minor’s structured settlement and there must be clear proof that the transaction would be in the child’s best interest. This may include additional medical bills, but not a new home or alternative investments. The court will put many restrictions around this type of structured settlement to preserve the funds for the minor until they turn 18 years old.

What is pre-settlement funding?

Pre-settlement funding helps cover medical and living expenses while a lawsuit is still in progress. The lender consults your lawyer to determine the likely outcomes of the case. If you qualify, you may receive a portion of the funds in advance. If you end up losing the case, you don’t have to repay the financing company. However, if you do win a structured settlement, you must pay the lender interest and funding fees, which lowers the total amount that you receive. 

How to Sell a Structured Settlement?

In some cases, you may wonder if it’s worth selling your structured settlement. Maybe the periodic payments aren’t actually providing a substantial financial safety net. Or maybe you want to buy a house and could use additional cash to help fund the purchase. 

You can sell your structured settlement for a lump sum if court-approved, but the drawback is that you won’t receive the full value of the remaining payments. Instead, purchasing companies charge a discount rate, which is subtracted from the total value of your structured settlement annuity.

The discount rate ranges between 9% and 20%. So if your remaining structured settlement payments total $50,000, the purchase offer you receive may actually only be between $40,000 and $45,500. 

Additionally, you can’t just sign a few forms to sell your structured settlement. The transaction must be approved by a judge to make sure the sale won’t hurt your financial security and will instead help you. Consult a legal or financial advisor before making a decision so you can choose the best move for both your current situation and your financial future.

Federal and State Laws Regulating Structured Settlements

There are several laws governing how structured settlements are handled, both at the federal and state levels.

  • Periodic Payment Settlement Act: This mandates that structured settlement payments are not subject to income tax, unless the structure has been altered in some way. 
  • Structured Settlement Protection Acts: Each state has its own set of laws outlining the rules of selling a structured settlement. 

Frequently Asked Questions

Which is better: a structured settlement or a lump sum?

It depends on your needs. If you’re experiencing temporary financial hardship, like short-term medical bills or a loss of job you expect to recover from, then a lump sum may be a better option for your structured settlement. 

But if you’re likely to be financially impacted for a long period of time, period payments could help you cover ongoing healthcare bills or loss of income. Extended payments can also provide better financial stability, especially if you think you’d be tempted to spend through a lump sum.

How long does it take to get money from a structured settlement?

There are many factors that impact the timeline of actually receiving your structured settlement. Both the processing of your lawsuit and the insurance company could slow things down. However, once the settlement agreement is in place, you could start receiving your funds between a few days and a few weeks.

How long does a structured settlement last?

It depends on the terms of your settlement agreement. Some may last for a set number of years, while others are designed to last your entire life. 

What happens to your structured settlement if you get divorced?

It depends on several factors, including state marriage laws. If the structured settlement was awarded during the marriage and you live in a community property state, a structured settlement from a civil lawsuit may be divided between the two spouses because joint property is usually divided equally. The exception is if you and your spouse have a prenup with a specified arrangement. 

However, if you received the settlement before the marriage, you may be entitled to keep the entire amount, particularly if you live in a state with equitable distribution. Even if assets are jointly owned in an equitable distribution state, they may not be divided equally. The court considered many different factors.

How much do you usually get if you sell your structured settlement?

The remaining value of your structured settlement is calculated, then the purchasing company subtracts its discount rate. This usually reduces the value of your structured settlement by 9% to 20%, lowering the amount of cash you actually get in return for the sale. It’s important to consult with a financial or legal professional to help you weigh the pros and cons before you consider selling a structured settlement. Additionally, a judge will need to approve the transaction to make sure it’s in your best interest and protect you against potentially being exploited.