What is a Structured Settlement?

Shawn Plummer

CEO, The Annuity Expert

As economic landscapes evolve, comprehending different financial arrangements becomes increasingly essential. One such arrangement that often generates curiosity is the annuity structured settlement. Despite its relevance, many people struggle to grasp the intricacies, often leading to misunderstandings. In this guide, we will demystify the concept of annuity structured settlements, answer crucial questions, and delve into their implications for your financial future.

Confused About Annuities?

Are you new to annuities and unsure where to begin? Visit our Annuity Learning Lab for expert guidance and insights.

The Basics: What is a Structured Settlement?

A structured settlement is a negotiated arrangement where an injured party agrees to resolve a personal injury claim by receiving part or all of a settlement in the form of periodic payments. Instead of a lump-sum payment, the claimant receives a steady income stream tailored to meet future financial needs. This payment approach offers a safer, more predictable alternative to a one-time payout.

Example: Consider John, who suffered severe injuries in a car accident caused by a distracted driver. After a lengthy legal process, John agreed to a structured settlement worth $2 million over 20 years. Instead of a one-time lump sum payment, John will receive an annual income of $100,000, helping him manage his ongoing medical and living expenses.

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

The Intersection: How Does an Annuity Work in a Structured Settlement?

An annuity is a financial product offered by insurance companies that provides a series of payments in return for an initial investment, often utilized to provide income during retirement. In the context of a structured settlement, an annuity contract is used to guarantee periodic payments to the claimant. The funds invested in the annuity produce earnings that fund the cost of future periodic payments, ensuring the claimant gets paid in full and on time.

Example: In John’s case, the defendant’s insurance company would purchase an annuity for an agreed sum from a reputable life insurance company. This annuity guarantees John’s annual payments of $100,000 for 20 years, ensuring he receives his full settlement and providing financial stability for John’s future.

Structured Settlement

Unraveling the Connection: Is an Annuity a Structured Settlement?

While both annuities and structured settlements provide periodic payments, they aren’t the same. An annuity is a broader term referring to a contract sold by insurance companies that guarantees the holder periodic payments for a fixed period or lifetime. Meanwhile, a structured settlement is an annuity designed to meet an injured party’s needs following a lawsuit settlement.

Example: Susan, a retired teacher, buys an annuity from an insurance company using her retirement savings. This annuity guarantees her a steady income during her retirement years. Unlike John’s case, Susan’s annuity is not a structured settlement—it’s a financial planning tool she chose to secure her retirement income.

Structured Settlement Annuities

Ownership Dynamics: Who Owns the Annuity in a Structured Settlement Agreement?

The defendant or insurance company typically owns the annuity policy in a structured settlement. The annuity policy ensures the company remains solvent and can fulfill its obligation to the claimant. It is crucial to note that the claimant has no rights to the annuity policy itself but has the right to receive the payments specified in the settlement agreement.

Example: In the context of John’s settlement, the defendant’s insurance company would own the annuity. They would be responsible for ensuring the payments to John align with the settlement agreement. John does not own the annuity but has the legal right to receive its payments.

Income Stream: Do You Receive Income Payments from a Structured Settlement Annuity?

Yes, a structured settlement annuity provides a steady income stream over a specified period, often years or even a lifetime. These payments are typically tax-free and can be customized to fit the claimant’s needs, including immediate needs, future care costs, and periodic lump-sum payments for anticipated expenses.

Example: According to the terms of his structured settlement, John will receive $100,000 annually over the next 20 years. This steady, predictable income helps John manage his ongoing medical and living expenses without the financial stress of a lump-sum payout.

What Is A Structured Settlement Annuity

Locating Your Settlement: How Do I Find My Structured Settlement?

If you’re struggling to locate your structured settlement, starting with the attorney representing you in the lawsuit is advisable. They can provide details about the insurance company that issued the annuity. Additionally, the settlement agreement should include the name of the annuity provider. Contact structured settlement annuity companies or consult a financial advisor if all else fails.

Operating Mechanism: How Does a Structured Settlement Annuity Work?

A structured settlement annuity is a long-term agreement providing regular, tax-free payments to the claimant over a defined period. After a legal claim is settled, the defendant (or, more commonly, their insurer) purchases an annuity from a life insurance company. This annuity contract is designed to match the agreed payment schedule. The insurer then pays the claimant, providing a consistent income stream.

Example: Let’s take a look at John’s situation again. Once the lawsuit was settled, the defendant’s insurance company bought an annuity matching John’s agreed payment schedule. This annuity generates an annual payment of $100,000, providing John with a stable income to manage his financial needs.

Next Steps

Essentially, a structured settlement annuity is a financial tool for spreading payments over time in a predictable manner. The ownership and control of the annuity remain with the defendant or the insurance company, ensuring the claimant’s financial needs are met without undue risk. And while locating your structured settlement might require some due diligence, it’s typically a straightforward process involving your legal representative or the insurance company involved in the settlement.

Structured Settlement Annuity

Request A Quote

Get help from a licensed financial professional. This service is free of charge.

Contact Us

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.

What is a structured settlement?

A structured settlement is a type of financial arrangement in which an individual or family receives periodic payments over time, instead of a lump sum payment. The payments are based on the terms established in a legally binding agreement between the parties involved.

How to find my structured settlement?

To find your structured settlement, contact the company that issued it or an attorney who specializes in this type of agreement. They can provide information on the terms of your settlement and what resources are available.

Can a structured settlement be changed?

Yes, a structured settlement can be changed under certain circumstances. Depending on the type of agreement, additional funds or an extension of payments may be allowed by the courts. However, any adjustments must adhere to the terms of the initial agreement.

How does a structured settlement annuity work?

A structured settlement annuity is a payment plan designed to provide long-term financial security. The payments are issued in fixed amounts over a predetermined period of time and can be customized according to an individual’s needs. This type of annuity provides guaranteed payments forever, or for a certain length of time, depending on the contract. Funds from the annuity may also be invested in order to generate additional income.

Do structured settlements earn interest?

Yes, structured settlements can earn interest. Depending on the terms of the settlement, the interest rate may be fixed or variable. Generally speaking, a higher interest rate is associated with longer-term payments, and a lower interest rate is associated with short-term payments. The amount of interest earned can also be affected by other factors such as the type of investments and tax considerations.

Related Reading

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. 

Scroll to Top