How Do Structured Settlements Work?

How Do Structured Settlements Work?

Explore the topics in this section to gain a full understanding of the different forms structured settlements can take and the reasoning behind them.

Being Awarded a Structured Settlement

The process of settling a civil case through a structured settlement involves the person who has been wronged (the plaintiff), the person or company who caused the harm (the defendant), a consultant experienced in such cases (a qualified assignee) and a life insurance company.

Awarding Structured Settlements Process

The plaintiff sues the defendant to seek compensation for an injury, illness or death the defendant caused. Often the defendant agrees to give money to the plaintiff through a structured settlement in order to keep the lawsuit from going to trial. If the case does go to trial and the judge rules in the plaintiff’s favor, the defendant may then be forced to set up a settlement.

The defendant and the plaintiff work with a qualified assignee to determine the terms of the structured settlement agreement — that is, how much the regular payments should be, how long they should continue for, whether they should increase or be supplemented by larger payouts at certain times, and so on. The defendant provides money for the qualified assignee to buy an annuity for the plaintiff.

The qualified assignee purchases an annuity from a life insurance company, setting up the annuity contract to match the settlement needs. Once the terms of the annuity are set, they cannot be changed. An immediate lump sum may also be set aside to cover attorney fees or to fund a specified trust.

The life insurance company pays the plaintiff a series of payments over time, according to the terms of the annuity contract. The annuity earns interest to protect its value from inflation, and the only way for the plaintiff to get cash from the settlement ahead of schedule is to sell the right to future payments on the secondary market.

Calculating the structured settlement amount can be a complex financial task. A financial advisor or lawyer will typically hire an economist to help calculate the value of the contract.

Explore the topics in this section to gain a full understanding of the different forms structured settlements can take and the reasoning behind them.

Being Awarded a Structured Settlement

The process of settling a civil case through a structured settlement involves the person who has been wronged (the plaintiff), the person or company who caused the harm (the defendant), a consultant experienced in such cases (a qualified assignee) and a life insurance company.

Awarding Structured Settlements Process

The plaintiff sues the defendant to seek compensation for an injury, illness or death the defendant caused. Often the defendant agrees to give money to the plaintiff through a structured settlement in order to keep the lawsuit from going to trial. If the case does go to trial and the judge rules in the plaintiff’s favor, the defendant may then be forced to set up a settlement.

The defendant and the plaintiff work with a qualified assignee to determine the terms of the structured settlement agreement — that is, how much the regular payments should be, how long they should continue for, whether they should increase or be supplemented by larger payouts at certain times, and so on. The defendant provides money for the qualified assignee to buy an annuity for the plaintiff.

The qualified assignee purchases an annuity from a life insurance company, setting up the annuity contract to match the settlement needs. Once the terms of the annuity are set, they cannot be changed. An immediate lump sum may also be set aside to cover attorney fees or to fund a specified trust.

The life insurance company pays the plaintiff a series of payments over time, according to the terms of the annuity contract. The annuity earns interest to protect its value from inflation, and the only way for the plaintiff to get cash from the settlement ahead of schedule is to sell the right to future payments on the secondary market.

Calculating the structured settlement amount can be a complex financial task. A financial advisor or lawyer will typically hire an economist to help calculate the value of the contract.

Explore the topics in this section to gain a full understanding of the different forms structured settlements can take and the reasoning behind them.

Being Awarded a Structured Settlement

The process of settling a civil case through a structured settlement involves the person who has been wronged (the plaintiff), the person or company who caused the harm (the defendant), a consultant experienced in such cases (a qualified assignee) and a life insurance company.

Awarding Structured Settlements Process

The plaintiff sues the defendant to seek compensation for an injury, illness or death the defendant caused. Often the defendant agrees to give money to the plaintiff through a structured settlement in order to keep the lawsuit from going to trial. If the case does go to trial and the judge rules in the plaintiff’s favor, the defendant may then be forced to set up a settlement.

The defendant and the plaintiff work with a qualified assignee to determine the terms of the structured settlement agreement — that is, how much the regular payments should be, how long they should continue for, whether they should increase or be supplemented by larger payouts at certain times, and so on. The defendant provides money for the qualified assignee to buy an annuity for the plaintiff.

The qualified assignee purchases an annuity from a life insurance company, setting up the annuity contract to match the settlement needs. Once the terms of the annuity are set, they cannot be changed. An immediate lump sum may also be set aside to cover attorney fees or to fund a specified trust.

The life insurance company pays the plaintiff a series of payments over time, according to the terms of the annuity contract. The annuity earns interest to protect its value from inflation, and the only way for the plaintiff to get cash from the settlement ahead of schedule is to sell the right to future payments on the secondary market.

Calculating the structured settlement amount can be a complex financial task. A financial advisor or lawyer will typically hire an economist to help calculate the value of the contract.

Options for Annuity Owners to Sell Payments

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. 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.

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. 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.

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. 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.

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. 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.

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. 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.

Cons of Structured Settlements

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.

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.

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.

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.

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.

Pros of Structured Settlements

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.

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.

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.

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.

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.

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.

Structured Settlement Pros and Cons

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.

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.

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.

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.

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.

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.

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.

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.

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.

Payout Options for Structured Settlements

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.

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.

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.

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.

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.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.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.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.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.

How Do Structured Settlements Work?

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.

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.