Money & Finance

What Is A Structured Settlement, And How Does It Work?

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Person going over financesIs your knowledge of structured settlements limited to J.G. Wentworth’s opera commercial (cue the unforgettable jingle)? If you’ve ever wondered what in the world a structured settlement is or need all the details on how it works, you’re in the right place.

Jeff Butler is our financial guru, holding an undergraduate degree in Finance from Malone University. He has a diverse background in small business ownership, accounting and property management. With his expertise in personal finance, Jeff consults on and reviews our investing and financial content, including this article.

What Is A Structured Settlement?

A structured settlement, often referred to as a structured settlement annuity, is a long-term stream of payments to someone (a plaintiff) who has won or settled a civil lawsuit with a defendant. It’s another, often smarter, way to receive a court award for damages other than a lump-sum payment.

Structured settlements are legally binding. The U.S. Congress backed structured settlements in 1982 when they passed the Periodic Payment Settlement Act, which encourages their use in tort physical injury and similar cases.

Structured Settlement vs Lump Sum

Wouldn’t it be better to settle for a lump sum payment? Yes, but only if the amount owed is small enough. A structured settlement for a large sum can offer a guarantee of long-term payment.

One of the major reasons you’d want to go for the structured settlement comes down to taxes. If you win a $100,000 lawsuit for injuries you sustained in a car accident, for example, and take the lump sum payment, you’re required to pay taxes on dividends and interest once you invest the lump sum. Structured settlement payments are entirely income tax-free.

3 Most Common Structured Settlements (With Examples)

These are the three most common cases for taking a structured settlement, but there are many other examples.

  1. Personal Injury: A personal injury civil case involves a lawsuit by an injured plaintiff seeking money from a defendant believed to be responsible for the injury. A structured settlement helps the injured party pay for medical bills.
  2. Wrongful Death: In the event of the wrongful death of a family member, remaining family members may be entitled to a structured settlement to help sustain their financial needs.
  3. Medical Malpractice: Injured patients or the families of deceased patients suing a doctor for medical malpractice can use the income from a structured settlement for additional medical costs or long-time financial support for surviving family members.

How Does A Structured Settlement Work?

A licensed structured settlement consultant will work with all attorneys, the defendant, and the plaintiff during the entire settlement process. Once you decide to take a structured settlement, the consultant uses the money to purchase an annuity from a life insurance company of your choosing.

It’s crucial to choose a highly-rated insurance company, preferably one that specializes in structured settlements. This company will manage your annuity, so if you opt for a risky company that goes out of business, for example, your annuity disappears.

You then negotiate the terms of your structured settlement annuity. Your term options are pretty flexible. You can determine these five things:

  1. When you want to begin receiving payments. Your annuity continues to earn interest regardless of when payments begin.
  2. How often you want to receive payments.
  3. How long you want to spread out your payments, i.e., for 10 years or the rest of your life.
  4. If you want to begin increasing or decreasing the payment amount you receive over time.
  5. Whether you want an initial large-sum payment to help cover immediate costs or a final lump-sum payment.

Note: Plan your terms carefully. Once you’re locked into the annuity contract, you can’t make any changes for the life of the settlement annuity.

Structured Settlement For Minors

Minors may be awarded money from a lawsuit for several reasons, including a product-liability claim, the wrongful death of a parent, medical malpractice or injuries from a car accident or other causes.

Structured settlements function in the same way as for adults; however, the courts dictate and enforce the terms of the settlement to ensure the money is being used for the child’s needs and that the child continues to receive regular payments once they turn 18.

5 Benefits Of A Structured Settlement

In addition to tax-free payments and guaranteed long-term income, here are five significant benefits you get with a structured settlement:

  1. An heir of the recipient can continue to receive tax-free payments in the event of the recipient’s death.
  2. Structured settlements don’t fluctuate with the market, unlike stocks, bonds and mutual funds.
  3. A structured settlement can yield more than a lump-sum payout from the interest your annuity earns over time.
  4. You can include future lump-sum payouts or benefit increases when you’re finalizing terms.
  5. You have the option of selling your structured settlement annuity if conditions arise where you need to cash it out.

5 Downsides To Structured Settlements

Everything that has an upside, has a downside. Here’s five potential downsides to structured settlements:

  1. You can’t renegotiate the terms once they’re finalized with the insurance company.
  2. Your funds aren’t immediately accessible.
  3. You’re required to pay surrender charges and IRS penalties if you withdraw funds before age 59½.
  4. Attorney’s fees and punitive damages associated with the structured settlement are taxable.
  5. Some states don’t require insurance companies to disclose their administrative fees to establish a structured settlement. Be sure to ask your attorney and the company about out their specific structured settlement rates.

How Can I Sell A Structured Settlement?

There are many companies that will purchase structured settlements if you “need cash now.” The video below gives you essential information about selling a structured settlement. Be aware, however, that a judge must approve the sale.

Thinking Ahead Financially?

If you’re considering a structured settlement vs a lump-sum payment, you’re likely thinking ahead about your long-term finances and legal needs.

Need to get your personal finances in order? See our personal finance software reviews to find out how you can incorporate your structured settlement payments into your ongoing budget to make sure you’re not wasting the added income.

Haven’t done your will or need to update it? Check out our reviews of online sites where you can create and file your will for a fraction of the cost of attorney fees.

Sources:; National Structured Settlements Trade Association

Sally Jones

While attending the University of North Carolina at Chapel Hill’s graduate school for journalism and public relations, Sally began a long career researching and writing about hard-to-understand topics, such as insurance and finance. Her additional experience in marketing, fundraising, public relations and financial planning at various foundations and nonprofit organizations over the years has given her the practical tools to inform consumers about making the smartest business and personal financial decisions. Her work has appeared in many notable media outlets, including The Washington Post, Entrepreneur, People, Forbes, Huffington Post, and more. Speaking of smart living — growing up in the (at-the-time) per-capita murder capital of the U.S. (Richmond, VA) taught her a thing or two about the need for personal and home safety. Sally stays on top of all the latest gadgets and services to protect her and her teenage daughters from potential predators and thieves. And she brings this knowledge to every article she writes.

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