What is a Structured Settlement?

Shawn Plummer

CEO, The Annuity Expert

What is a structured settlement annuity? A Structured Settlement is defined as a settlement derived and negotiated from a person or company winning a civil case. A settlement typically includes a lump sum of cash upfront (cash advance), one time, to cover immediate expenses, followed by guaranteed periodic payments, tax-free, customized to meet the needs of the settlement winner.

It would be best if you thought in terms of winning a personal injury lawsuit due to a car crash. First, an annuity settlement is negotiated between the plaintiff and the defendant. The settlement is then distributed in a series of periodic payments over an agreed amount of time rather than a lump sum payment in most cases.

Typical settlement scenarios include a personal injury case, workers compensation case, medical malpractice, and wrongful death claims.

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 structured in a way dictated by the court system.

Structured settlement annuities are similar to either an immediate annuity or 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, sometimes, settlement money is 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.

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Why Do I Need a Structured Settlement?

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

  • Rehabilitation
  • Lost wages
  • Medical Expenses
  • Funding a child’s tuition
  • Home modifications
  • Retirement income
  • Funeral costs

Ideal Cases For Structured Settlements

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

Structured Settlements For Minors

In some cases, 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 spending the settlement money for themselves.

Structured Settlements and Minors

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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

How to Sell a Structured Settlement

You might have seen commercials during daytime or late-night television describing selling your annuity for cash. These are called secondary market annuities. Secondary Market Annuities is when a 3rd party company gives a settlement owner a lump sum of money for the structured settlement payment. Basically, 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

If you need help or would like to buy structured settlements, we have partnerships with settlement firms to provide the best policy for you. Just inquire here with “Structured Settlement Request” in the subject line.

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 on how to sell 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 either an equitable division 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, whether before or during the marriage.

Can a structured settlement be inherited?

Since the structured settlement annuity is essentially an income annuity, inheritance is treated as such. If the annuity is set up for life contingent payments (life only, joint, and survivor), then typically, there is 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 normally 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?

Pacific Life, Prudential Financial, Mutual of Omaha, USB Financial, and AIG.

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.

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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