A Structured Settlement Is What?

A structured settlement is a type of financial agreement in which persons who have received a settlement or a substantial quantity of money receive a series of monthly payments over time rather than a flat sum. Structured settlements, which are frequently the consequence of judicial proceedings, provide financial security and stability while also allowing for tax-free customized payments.

Important Takeaways

  • Structured settlements are a series of tax-free payments made to a party who has been injured. Settlement payments are often meant to compensate for damages or injuries sustained as a result of judicial proceedings.
  • Payments for structured settlements are guaranteed. They do not move with market changes, unlike stocks, bonds, and mutual funds.
  • Spreading payments out over time can help decrease temptation, but there’s little you can do after the details of a structured settlement have been established.
  • Structured settlements are frequently employed in personal injury, workers’ compensation, medical malpractice, and wrongful death situations.
  • If you’re thinking about selling a structured settlement, you should evaluate your loss, consult a financial counselor, and fully understand the process.

Defined Structured Settlements

A structured settlement is a sort of court settlement that is paid out as an annuity rather than a lump-sum payment. A structured settlement often gives tax benefits to the person receiving it while simultaneously saving the party paying the settlement some money.

Structured settlements are straightforward. Many civil disputes culminate in one person or organization paying money to another to make things right. Those determined to be at fault may agree to a settlement on their own, or they may be forced to pay the money if their case is lost in court.

Structured settlements are usually voluntary agreements between the defendant and the injured party – both parties usually have a say in whether a structured settlement or a lump sum payment is established.

The wronged party may choose to accept a lump sum settlement if the amount of money is small enough. A structured settlement annuity is frequently created for larger sums. Various factors, including the recipient’s financial needs and preferences, future financial planning and tax considerations, and the general negotiation process between the parties involved, frequently affect this decision.

When a structured settlement is ordered, the money is allocated toward an annuity, which is a financial instrument offered by an insurance company that assures regular payments over time. 

The agreement also specifies the series of payments that will be made to the awarded party as compensation for the injury done to them. Because the recipient cannot consume the stream of payments rapidly, spreading the money over a longer period provides a better guarantee of financial security.

Structured Settlements: How Do They Work?

Structured settlements are the result of court settlements that insurance companies eventually pay out. Structured settlements, on the other hand, involve four parties.

Participants in a Structured Settlement:


The person who has been hurt. The claimant files a lawsuit against the party they believe is responsible for the injury.


The person or entity against whom the claimant files a lawsuit. If the defendant loses in court or settles before going to court, they may set up a structured settlement to pay for the compensation.

Company in charge of the assignment

The defendant — or their insurance carrier — executes a qualified assignment to shift their duty to make periodic settlement payments to the claimant. The obligation is assigned to an assignment business, which assumes the obligation.

Company of Insurance

Assignment firms typically collaborate with life insurance providers. The assignment firm purchases a structured settlement annuity from the life insurance company and pays the claimant for the term of the annuity contract.

While the arrangement may appear convoluted, it is intended to return damages and restitution to the claimant.


The assignment business owns the structured settlement annuity, not the claimant, in contrast to traditional annuities, which belong to the person receiving the benefits. If a claimant wants to sell a structured settlement annuity, they must usually seek court approval.

The Benefits of Structured Settlements

Structured settlement annuities are useful in a wide range of circumstances. Although these periodic payments have various advantages, it is critical to understand both the rewards and the risks before making any financial investment.

When a plaintiff obtains a settlement in the form of a single lump sum, he or she may spend it too rapidly. To remedy this, Congress decided when creating the structured settlement process that injured parties should be encouraged to receive payments on a regular basis over time. This will ensure that they have a consistent source of income to meet their living expenses as well as any medical needs.

To encourage this path, Congress added tax breaks for claimants who receive settlements.

If they invested a lump-sum settlement payout, the interest and dividends they earned would be taxed. However, all interest and taxes generated through an annuity are tax-free.

Structured Settlements Have Several Advantages

  • Payments are still tax-free.
  • Even after the recipient’s death, the beneficiary can continue to receive tax-free payments.
  • Flexibility in payment structuring and scheduling
  • Future lump-sum distributions or benefit increases are a possibility.
  • Spreading out payments prevents impulsive spending while also ensuring future income, which is especially important for long-term care needs.
  • Structured settlements offer stability because they are immune to market fluctuations and have the issuing insurance company’s guarantee.
  • Because of accrued interest, a structured settlement frequently provides more than a lump-sum payoff.

According to Hunter Garnett, managing partner of Garnett Patterson Injury Lawyers in Huntsville, Alabama, structured settlements can also insulate the beneficiary — or plaintiff — from being harassed by friends or relatives for money from the settlement.

“The plaintiff is much more likely to spend money frivolously or give loans to friends or family,” Garnett told Annuity.org. “By structuring the funds, a client can truthfully tell friends and family that they don’t have enough money available to make loans or gifts to them.”

Structured Settlements Have Drawbacks

The major problem with structured settlements is that they are not flexible once they are in effect. You must abide by the contract, which restricts your access to the funds in the structured settlement annuity and lowers their value if you sell them.

Structured Settlements Have Drawbacks

  • Once concluded, you may not be able to change the terms, even if they no longer satisfy your needs owing to changing financial or economic situations.
  • In the event of an emergency, there is a lack of fast access to finances. 
  • Inability to invest a lump-sum settlement in higher-return assets.
  • When you sell your payments for immediate cash, you get a lower price. This means that the cash you earn from selling the payments will be less than the amount you would have received from future payments.
  • Some states do not require insurance providers to disclose costs, which might result in money lost due to unreported administrative fees.

Structured settlements’ fixed nature, according to California personal injury attorney Martin Gasparian, contributes to their main disadvantages.

“If the plaintiff requires funds urgently, they will not be able to access them without impacting the annuity contract, potentially causing costly complications,” Gasparian explained to Annuity.org. “Also, the interest rate remains fixed and will not rise, implying a low rate of return.”

An individual may receive a structured settlement for a variety of reasons. Personal injury, workers’ compensation, medical malpractice, and wrongful death are the most typical types of claims.

Structured Settlement Case Types: Most Common

Accidental Injuries

In a personal injury case, an injured person files a civil action seeking monetary compensation from the party thought to be responsible for the harm. A structured settlement pays out monies to recipients to cover medical expenditures and other costs.

Compensation for Workers

Workers’ compensation compensates employees who are injured at work by replacing wages and covering medical treatment and other expenditures while they are unable to work.

Malpractice in Medicine

In circumstances where doctors cause injury rather than aid, injured patients or the families of deceased patients might file a medical malpractice lawsuit.

Unjust Death

Structured settlements are frequently utilized to pay family members who believe their loved ones died as a result of wrongful death. Families who file these claims may receive a succession of tax-free payments to replace lost income following the death of a loved one.

Assigned vs. Unassigned Cases in the Legal System

Structured settlements are financial instruments as well as legal judgments. While they function similarly to private assets, they are also subject to a plethora of laws. These differ depending on whether the case is assigned or unassigned.

A third-party assignment company collects the monies from the defendant and then purchases the annuity from a different insurance company in assigned cases. That annuity will then cover the claimant’s periodic payments. The claimant, or plaintiff, has no influence over the annuity contract, and it is up to a third party to provide the settlement payments.

In contrast, the defendant in an unassigned case does not involve a third party. The defendant technically owns the annuity, while the aggrieved party is named as the payee. This also implies that the defendant is in charge of paying the periodic payments, exposing the claimant to the risk of non-payment or default.

Structured Settlement Payment Options

Structured settlements can have a variety of compensation alternatives. The most immediate decision is when the payments will begin and how long they will last.

If you want to receive your lawsuit payout through a structured settlement, you can choose whether to start receiving funds immediately or later. Immediate payments can be useful if you need medical care or have lost your source of income, for example. You may also choose to defer the payments to a later date, such as after you retire. The annuity will grow as it generates interest during the waiting period.

You can also specify whether the annuity should be paid for the remainder of your life or for a set number of years, as well as the payment schedule, payment amounts, and adjustments.

Before receiving their payment, litigants frequently require funds for a range of expenses. Consider pre-settlement finance options to tide you over while you wait for your first structured settlement payment or initial lump sum payout.