Structured Settlement: What It Is & How It Benefits You

Structured Settlement: What It Is & How It Benefits You

Structured Settlements

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 many times offers a better future guarantee of money than a lump-sum payout.

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.

A structured settlement is a stream of payments to a person who won or settled a lawsuit. The defendant funds the settlement. These resolutions differ from lump-sum settlements because of the way the money is paid over time.

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:

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 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 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.

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.

Source : annuity.org