What is a Structured Settlement?

Shawn Plummer

CEO, The Annuity Expert

If you’ve been injured in an accident, you may have received a settlement offer from the insurance company. But what is a structured settlement, and how does it work? In this guide, we will discuss the basics of structured settlements and how they can help injured parties receive the money they need to rebuild their lives.

What Is A Structured Settlement?

A structured settlement is a financial arrangement in which payments are made to the recipient over time rather than in one lump sum.

Structured settlements are often used to provide financial compensation for victims of personal injury lawsuits, but they can also be used in other types of legal cases. For example, an insurance company typically makes annuity payments from a structured settlement, which may be made monthly, yearly, or in a lump sum.

In some cases, the payments may continue for the recipient’s lifetime. Structured settlements can provide much-needed financial security for those who have suffered a physical or emotional injury. They can also help to ensure that the recipient does not have to worry about unexpected medical expenses or other financial challenges.

The Periodic Payment Settlement Act of 1982

The structured annuity came about in 1983 after the Periodic Payment Settlement Act of 1982 was established.

How does a Structured Settlement work?

After the settlement money is negotiated and comes to final terms, the court order will request the funds to be placed into a type of income annuity contract called structured annuities. The annuity is an irrevocable stream of regular payments from an insurance company, which is dictated by the court system.

Structured settlement annuities are similar to either an immediate annuity or a deferred annuity. The structured settlement payments are guaranteed and irrevocable; however, the annuity settlement options can differ from typical income contracts. For example, in a structured settlement payout, the payments may increase or decrease down the road multiple times. 

Not all settlement annuities are structured in a payment schedule. For example, settlement money is sometimes paid out in a lump sum within a settlement agreement.

Disclaimer* Videos shown below are for educational purposes and are not a sponsorship of the life insurance company.

Why Do I Need a Structured Settlement?

Structured settlement annuities can fulfill needs created from the original accident or death. Those needs include:

Ideal Cases For Structured Settlements

  • Medical Malpractice
  • Auto Liability
  • General Liability
  • Maritime
  • Railroad
  • Government
  • Non-Physical Injury Cases

Structured Settlements For Minors

Sometimes, a minor is involved in a personal injury, product liability claim, or other scenarios where the child was severely injured. Like adults, minors can also benefit from structured settlements. However, the payments are primarily meant to fulfill the child’s needs until adulthood.

The key difference between adults and minors is that minors can not control their settlement payments, so the parents are in charge. The parents must follow the court orders on spending the settlement money until the child has reached age 18.

The Court Protects The Minor From:

  • The child from spending all of the settlement money at once.
  • The parents spend the settlement money for themselves.

Structured Settlements and Minors

Pros and Cons

Pros

Cons

  • Settlement annuity payments are irrevocable, meaning you can’t edit, re-negotiate, or walk away (unless sold).
  • No liquidity for emergencies.
  • Doesn’t earn a ton of interest (average is 1% to 1.5% annually)

Structured Settlement Companies

What Do My Beneficiaries Receive When I Die?

Structured settlements may or may not offer a death benefit to beneficiaries. If a death benefit is offered, a series of payments is the standard method of distributing the proceeds.

Helpful tip: Life insurance might be a better option if you want to leave money to your beneficiaries. In some cases, you don’t need to take a medical examination. Use our free tool to compare cheap life insurance quotes. Coverage starts at $9.37 per month.

How to Sell a Structured Settlement

You might have seen commercials during the daytime or late-night television advertising selling your annuity for cash. These are called secondary market annuities. Secondary Market Annuities are when a 3rd party company gives a settlement owner a lump sum of money for the structured settlement payment. You sell your settlement payments at a heavy discount via a settlement transfer in exchange for a lump sum of cash. This transfer is called a Structural Settlement Factoring Transaction.

Find out more about Secondary Market Annuities.

Buy a Structured Settlement

A structured settlement can be a great way to ensure you receive the money you need to rebuild your life after an accident. If you have received a settlement offer from an insurance company, it’s important to understand a structured settlement and how it works. Contact us for a quote, and we’ll help you get started on receiving the money you deserve.

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Frequently Asked Questions

Why must Structured Settlements be court-approved?

The Federal Periodic Payment Settlement Act of 1982 made it mandatory for court approval on all sales of structured settlements to ensure the consumer’s best interest is put first and limit any party from taking advantage of the settlement recipient.

How are structured settlements taxed?

Regular payments from structured settlement annuities are tax-free.

Can structured settlement payments be sold?

Structured Settlements can be sold, and there is no set formula or standard for selling the payments. Seek an attorney or accountant to explore settlement planning options.

What happens to a structured settlement in a divorce?

Each state divides assets in an equitable or community property approach. If the state utilizes the equitable distribution method and the settlement was obtained before marriage, the settlement probably will be kept with the settlement’s owner. However, if the state takes the community property route, the state can divide the settlement regardless of whether the settlement was received before or during the marriage.

Can a structured settlement be inherited?

Since the structured settlement annuity is an income annuity, inheritance is treated as such. If the annuity is set up for life contingent payments (life only, joint, and survivor), there is typically no death benefit. This exception would be if a guaranteed term (single or joint life with a period certain) were put into place. If the settlement is structured to pay over a guaranteed fixed period of time, the annuity can usually be inherited for the remainder of the guaranteed installments. Inherited structured settlements should still provide tax-free payments to the beneficiary. Finally, there is a commutation rider on some settlements that allow the inherited annuity to be paid out in a lump-sum payment, so check on that as well.

Which insurance companies sell structured settlement annuities?

Are structured settlement annuities protected and insured?

Structured annuity contracts are protected by your state guaranty association, in which life insurance companies must set aside a reserve to the SGA in case of company insolvency.

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Shawn Plummer

CEO, The Annuity Expert

I’m a licensed financial professional focusing on annuities and insurance for more than a decade. My former role was training financial advisors, including for a Fortune Global 500 insurance company. I’ve been featured in Time Magazine, Yahoo! Finance, MSN, SmartAsset, Entrepreneur, Bloomberg, The Simple Dollar, U.S. News and World Report, and Women’s Health Magazine.

The Annuity Expert is an online insurance agency servicing consumers across the United States. My goal is to help you take the guesswork out of retirement planning or find the best insurance coverage at the cheapest rates for you. 

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