People usually encounter the term structured settlement during legal disputes, when decisions carry long-term consequences.
It typically enters the conversation with little explanation and even less context, leaving individuals unsure about what it implies.
The real issue is not the payout but the arrangement. Many settle without asking the right questions, which leads to avoidable complications.
Therefore, this article outlines how structured settlement works, why timing is critical, and what to expect in the process.
What Is a Structured Settlement?
A structured settlement pays compensation through scheduled installments rather than a single payout.
The funds are issued as a structured settlement annuity, set to disburse over months or years based on the agreed terms.
In this setup, both sides agree to the terms during the settlement agreement.
At the same time, the injured party and the defendant typically decide on the payment stream during negotiations, and both must approve the legal structure before finalizing.
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How Does a Structured Settlement Work?
Structured settlements work in the following ways:
Annuity Funding
The annuity used in a structured settlement comes from insurers with strong financial ratings, like New York Life Insurance Company or Metropolitan Life Insurance Company.
These contracts lock in a guaranteed payments schedule that can be adjusted to match the claimant’s long-term needs.
Some schedules include annual increases, lump sums at specific points, or adjustments based on projected expenses.
Legal and Financial Negotiations
Before finalizing the payment structure, lawyers and financial experts review future costs, such as medical expenses, housing, or income loss.
In cases involving minors or individuals unable to manage finances, a court may be required to approve the terms to ensure they’re fair and secure.
Types of Structured Settlement Payments
These are the types of structured settlement payments available for you:
Lump Sum with Smaller Ongoing Payments
The lump sum settlement format starts with a larger payment followed by smaller scheduled installments. In this setup, the goal is to cover high initial expenses without disrupting long-term financial stability.
Scaled-Up Payments
Scaled-up payment structure begins with lower payments that increase over time.
It suits cases where physical sickness may worsen or medical bills are expected to grow later. The schedule also reflects the progression of anticipated expenses.
Scaled-Down Payments
The scaled-down option reduces payments as time goes on. It’s typically used when recovery is expected or when future expenses will decrease.
The structure also accounts for reduced financial burden while providing consistent support.
Extra Payments for Specific Costs
Some plans include standard recurring payments and scheduled extras for known future needs. For example, a minor may receive standard annual fees, with additional amounts timed for college tuition or other milestone expenses.
Delayed Payments
Payments can also begin at a future date, usually set around retirement. This option fits cases where the claimant has no immediate need for funds and wants to secure income as part of broader retirement planning.
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Who’s Involved In a Structured Settlement?
Claimant or Plaintiff
The claimant or plaintiff is the person who files the civil lawsuit. They seek compensation for an injury or wrongful act caused by another party.
If the plaintiff wins, the court may approve a negotiated settlement using structured terms.
Defendant
The defendant is the individual or organization accused of causing the injury. If found liable, the defendant may agree to fund the structured settlement payment rights over time instead of paying it all at once.
Assignment Company
Rather than the defendant paying the claimant directly, the obligation is usually transferred to a third-party qualified assignment company.
This company purchases the annuity and assumes responsibility for making the payments, ensuring compliance with the Periodic Payment Settlement Act.
Insurance Provider
The life insurance company supplies the annuity contract. It issues the actual periodic payments based on the agreed terms, whether monthly, annually, or through custom intervals.
When to Use a Structured Settlement
Structured settlements generally apply in civil cases where the financial impact of an injury or death lasts beyond the date of the court decision.
These cases include:
Personal Injury Lawsuits
When someone suffers from injuries due to another party’s actions, they may file a personal injury claim to recover the costs of medical care, rehabilitation, and lost wages.
If the case settles or results in a court award, the settlement money can reduce the risk of financial mismanagement while covering ongoing treatment and support.
Wrongful Death Lawsuits
If a person dies as a result of another’s negligence or misconduct, their surviving family may pursue a wrongful death claim.
The court may award regular payments to help replace lost income or support dependents.
As a result, these payments are generally exempt under the Internal Revenue Code and do not count as gross or net income.
Medical Malpractice Lawsuits
When a healthcare provider causes harm by failing to meet the standard of care, the injured victims or their family may file a medical malpractice suit.
Structured settlements in these cases help spread payments across several years.
In cases of long-term physical injury or permanent disability, the structured settlement protection acts help enforce fair practices and guaranteed payments.
Workers’ Compensation Claims
Employees who suffer injuries while on the job can receive benefits through workers’ compensation.
If the settlement includes long-term wage replacement or covers treatment for a lasting condition, structured payments provide financial support while the injured worker manages recovery.
In all of these claims, the federal government permits structured arrangements with tax-free benefits under the Settlement Act of 1982.
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What Are the Benefits of a Structured Settlement?
With a structured settlement, you can expect the following benefits:
Tax-Free Payments
Under federal law, structured settlements from qualified cases, including personal injury, wrongful death, and workers’ compensation claims, remain tax-free.
This is because structured settlements benefit from tax exclusion under tax law. According to the Internal Revenue Code (IRC), recipients do not pay taxes on qualified payments received.
Since the IRS does not treat these payouts as income, the full value stays with the claimant.
Guaranteed Long-Term Income
Structured settlement payments follow a fixed schedule that may last for years or even a lifetime.
This long-term income is ideal for someone who cannot return to work or requires ongoing care. The structure can also align payouts with specific future needs, such as education or retirement.
Customization
Claimants can tailor structured payout options to fit their lives. Some choose to start payments later, add a lump sum payment, or adjust amounts over time.
This flexibility allows the plan to support known future costs like housing modifications, surgery, or long-term care.
Helps Prevent Unnecessary Spending
Access to funds is limited to scheduled disbursements, which reduces the temptation to overspend.
This helps recipients avoid overspending, impulse buys, unnecessary expenses, or lifestyle inflation they might regret, especially if they lack experience managing large sums.
Protection for Beneficiaries
If the recipient dies before paying the full value, structured settlements can pass the remaining payments to a named beneficiary.
This protection ensures that dependents, such as a spouse or child, remain supported without delay or probate issues.
No Risk of Market Volatility
Structured settlement payments are not invested and exposed to stock market swings or earned interest.
Claimants receive the same amount regardless of inflation, recession, or external economic changes, such as international conflicts. This certainty is beneficial for those who cannot afford unpredictable income.
Reduced Pressure of Borrowing from Friends or Family
Having a steady income from a structured settlement helps recipients avoid asking others for financial help.
It limits stress and keeps financial matters private. For many, this means they can recover or move forward without relying on strained relationships.
At the same time, consistent income reduces the need to take out different types of loans, such as personal loans, safeguarding financial security.
Structured Settlements Are Managed by Professionals
Life insurance companies handle the disbursements based on a legal contract. Recipients do not need to make investment decisions or track market conditions.
This professional management reduces administrative burden and keeps the process consistent and compliant.
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What Are the Limits of a Structured Settlement?
Before agreeing to a structured settlement, it’s crucial to understand how the following limitations may affect access to funds, flexibility, and overall value.
Lack of Flexibility
Once finalized, you cannot change the payment schedule without court involvement. The terms are fixed, which means the recipient cannot speed up disbursements or request larger payments later.
If an unexpected cost arises, the structured plan may not be able to cover it, forcing you to seek help elsewhere.
Discounted Payout on Sale
Selling future payments to a third-party buyer reduces the total payout. The amount offered depends on market rates, the schedule’s length, and the buyer’s fees.
Court approval is required, which slows down the process and adds legal steps. As a result, many sellers may receive far less than the original value of the settlement.
You May Not Receive the Full Value
Receiving payments over time reduces their present value. A dollar paid ten years from now is not worth the same as one received today.
Buyers also subtract fees and profit margins when purchasing future payments, which cuts into the recipient’s total return.
Monthly Payments May Not Be Suitable for Emergency Funds
Structured settlements are not designed for urgent, high-cost expenses. If someone faces a medical emergency or sudden legal issue, the scheduled monthly payout likely won’t suffice.
In these cases, separate sinking savings or loans may be necessary to fill the gap. Without other resources, this lack of liquidity can cause an added burden.
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How to Sell a Structured Settlement
Selling a structured settlement involves a legal process that permanently transfers future payments to a third party in exchange for a lump sum.
Below are steps and considerations:
Identify Your Reason for Selling Your Structured Settlement
Sellers usually need funds for immediate obligations like medical treatment, tuition, debt clearance, or housing costs.
This is why defining your goal helps clarify whether selling is necessary or if other options exist.
Courts will ask for this reason when reviewing the request, so the explanation must be specific and well-documented.
Understand the Process of a Structured Settlement
The sale involves more than signing a contract. It includes legal filings, document verification, buyer evaluation, and court review.
Processing times also vary by state, but usually span several weeks. At the same time, the transaction only completes after a judge confirms that the sale serves your long-term financial interests.
This step involves the following factors:
Finding a Buyer
Not all buyers offer the same terms. For this reason, you must carefully compare structured settlement purchasing companies.
Focus on their fee transparency, reputation, and support during the legal process.
Also, avoid firms with vague pricing, poor public feedback, or practices that pressure sellers into quick decisions.
Court Approval
A judge must approve the sale before funds are released. This legal step protects the seller from unfair terms.
You’ll need to submit supporting documents that explain why the sale is necessary and show how you plan to use the money.
Additionally, courts prioritize long-term well-being, especially in cases involving dependents or health-related needs.
Discount Negotiations
The lump sum you receive will be less than the total settlement value. This difference is based on a discount rate, which varies by company.
You can improve your offer by soliciting multiple bids and showing financial reliability. Payment schedules with consistent, predictable terms tend to attract better offers.
Transferring Rights
Selling your settlement means giving up all rights to future payments. Once the deal closes, the buyer receives your scheduled payouts directly.
You won’t be able to reverse the decision or control how the funds are used from that point forward.
Consult Legal, Financial, and Tax Professionals
Legal counsel is usually required before the court approves the sale. A qualified attorney can review the terms and identify any issues.
Meanwhile, a tax advisor can explain how the lump sum might affect your financial reporting or benefits eligibility.
On the other hand, a financial advisor helps evaluate whether selling makes sense based on your current cash flow, debt, and future goals.
These professionals’ input is helpful in comparing the offer to the long-term needs that the original settlement aims to cover.
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Comparing Structured Settlements in Assigned vs. Unassigned Cases
Assigned cases are claims assigned by the chief justice to particular judges, while unassigned ones are cases not assigned to specific individuals.
| Aspect | Assigned Case | Unassigned Case |
| Use of Third Party | Yes. A third-party assignment company is involved. | No. The defendant manages the annuity directly. |
| Who Purchases the Annuity | The assignment company buys the annuity from a life insurance company. | The defendant purchases the annuity. |
| Who Owns the Annuity | The third-party assignment company. | The defendant. |
| Who Makes the Payments | The life insurance company pays the claimant directly. | The defendant arranges payments through the annuity. |
| Claimant’s Control | The claimant has no control over the annuity contract. | The claimant is named the payee but has no ownership of the annuity. |
| Risk of Non-Payment | Lower. Responsibility is transferred to a financially stable third party. | Higher. Risk remains if the defendant defaults or fails to uphold the agreement. |
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The Bottom Line
Structured settlements are ideal when long-term stability takes priority over immediate access to funds. They follow strict legal processes, offer limited flexibility, and shift financial control to outside parties.
At the same time, they can protect claimants from mismanaging large sums, especially in cases involving long-term care or lost income.
Regardless, anyone considering this option should focus on the terms, not just the payout. The structure must match financial needs and desired compensation.
It may not be feasible if the settlement does not support expected expenses or if future liquidity is likely to become a concern.
If you want more resources on settlement options, long-term planning tools, and financial decision-making strategies, subscribe to Financial Daily Update today.
