What Are Structured Settlements?

When a personal physical injury, workplace injury, or wrongful death occurs, the injured party or their loved ones may file a claim against those responsible for or contributed to the accident. Lump-sum verdicts and settlements are well-known. They’re not the only option. In fact, for many, there’s an alternative that’s more appealing and better suited to their current and future needs: structured settlements.

Structured settlements are legal agreements made between plaintiffs and defendants. Instead of paying the settlement all at once in a lump sum of cash, the plaintiff receives a series of payments over a set time called periodic payments.

Structured settlements are highly customized and dependent on the claim, injury, and plaintiff’s personal and financial situation and can be arranged in a few ways:

• The full settlement amount is distributed in the periodic payments,
• A portion of the settlement is paid upfront, with the remainder distributed on an agreed-upon schedule of periodic payments, or
• There are periodic payments combined with an initial and/or future lump sum(s).

The amount of each payment can be the same or increase or decrease over time. Structured settlements are highly customizable in this aspect. Payments may begin immediately, but they can also be deferred, with the first one made several years later. It all depends on the situation and needs of the injured party or the family of a deceased loved one. But regardless of how much money and how it’s divided, structured settlements are on a set schedule that both parties agree to. And after these agreements are made, there’s very little that can be done to change them.

Even with a stringent agreement and the inability to change the terms, there are many benefits of a structured settlement for personal injuries, workplace injuries, and wrongful death cases. Understanding how they work is important for anyone involved in these types of lawsuits to make the best decision based on their situation.

How do Structured Settlements Work?

To start, both parties – the plaintiff and defendant – must agree to proceed with a structured settlement. They have to commit to it before the details are finalized, and once this type of settlement is agreed upon, the terms are negotiated.

An “assigned case” is the most common in structured settlements. The defendant uses a third-party company that purchases an annuity from an insurance company, which is used to fund the settlement structure and amounts. It’s the responsibility of the carrier of the annuity to pay the plaintiff on schedule, as outlined in the structured agreement. But what is an annuity?

Often used to provide income in retirement years, an annuity is a long-term investment that offers financial security through periodic payments. Annuities can start at different times and last for many years. In the case of structured settlements, when the injured party or family in a wrongful death claim is paid is part of the terms. How much the periodic payments are is also negotiated, and the settlement may include a combination of an initial lump sum and/or future lump sums.

“Unassigned cases” are much less popular in structured agreements because it’s the responsibility of the defendant or its insurer to make the payments. They put the plaintiff’s name as the payee on the annuity, but because they don’t transfer the periodic payment obligation to a third party, the settlement expenses remain on their books. There’s greater risk and less security for the injured party in an unassigned case. If the defendant goes bankrupt or into insolvency, the annuity – and therefore the remainder of the settlement – is in jeopardy.

U.S. Structured Settlement Laws

There are both federal and state laws about structured settlements. In 1982, Congress introduced the Periodic Payment Settlement Act in an effort to encourage personal injury settlements to be paid through structured settlements. It became a way for victims of personal physical injury to be more financially secure in the future. History had shown that lump sum payments were less beneficial than an agreement that provided regular payments over time because plaintiffs spent their settlement too quickly, leaving them unable to finance their future needs.

The Periodic Payment Settlement Act was immediately enticing to many plaintiffs because the money is tax-free. It also attracted assignment companies, which are subsidiaries of insurance companies, because the income from annuities purchased for structured settlements became tax-free for them too.

Years later, the Taxpayer Relief Act of 1997 made structured settlements an option in workplace injury claims. It expanded the Periodic Payment Settlement Act to cover not just personal physical injury and physical sickness damages tax-free but also worker’s compensation cases.

Beyond federal law, all but one state has a Structured Settlement Protection Act. They protect the recipient of periodic payments from businesses that buy structured settlement rights, often for a significantly lower amount than the sum of the remaining payments. Thanks to the Structured Settlement Protection Act, companies can only buy the rights if it’s in the injured party’s best interest, among other stipulations.

The Periodic Payment of Judgment Statutes exists throughout states as well. They allow judgments to be paid in more than one sum, essentially what the federal Periodic Payment Settlement Act allows; it allows certain types of settlements to be distributed in two or more payments.

These laws, combined with the 2017 tax reform, have led structured settlements to become even more common.

What are the Benefits of Structured Settlements?

Structured settlements appeal to and offer better options for many who suffer a personal injury or workplace injury or for the family in a wrongful death claim. Choosing a structured settlement over a lump sum breaks up the total settlement with future payments and is often the best way to protect the injured person’s future and provide financial stability. In fact, there are several benefits of structured settlements for plaintiffs, including:

Tax-Free Income

One of the most enticing aspects of structured settlements is that they are tax-free. When a cash settlement is given, and the plaintiff invests it, the earnings are taxed as personal income. But under the Internal Revenue Code, annuities purchased for structured settlements are protected and not taxed. They aren’t considered income, and payments are secure.

Financial Security

Structured settlements offer the injured party financial security because the amount of each payment and timeline are guaranteed, whereas cash settlements that leave the plaintiff to invest on their own are open to market fluctuations and volatility. Often, personal injury settlements that are given in one large sum are not properly or safely invested, or they simply underperform; there are no guarantees in these cases, putting the plaintiff’s cash – and future financial security – on the line. But structured settlement annuities are secure and take away market risks. The involvement of a third party also removes risks associated with the defendant going bankrupt or into insolvency.  

Financial security is essential when someone suffers a personal injury when they’re young. Ongoing medical bills and lost wages from being unable to work or having to limit work hours affect their financial security. A structured settlement could provide safety and guaranteed income in the future.

Needs-Driven & Customizable

Structured settlement terms are negotiated with the plaintiff’s needs in mind and are based on the situation. Many factors are considered during this process, including the plaintiff’s age, type of injury, and short- and long-term financial costs of living with the injury or illness.

Structured settlements can be customized to accommodate the cost of living increases, future costs that would require a lump sum payment, and even delay the start of payments for years. Some plaintiffs prefer to have their periodic payments begin in retirement, offering income and stability at a time when they’ll no longer have a job or steady income.

Financial Management

When large sums of cash are given, it can be challenging to know what to do with it, and people often spend it far too quickly. With structured settlements, there’s not only a guarantee that the money will be coming in, but it’s paid in increments, limiting a lot of the risks an immediate cash settlement creates. There’s no guessing how much money you’ll be getting, making it easier to manage. Not to mention the benefit of avoiding the high investor and financial institution fees that occur when investments are made on your own.

Total Payment is Higher

One other advantage to structured settlements is that the total amount the plaintiff receives is typically higher than what the defendant offers or pays in a one-time lump sum. The injured party may not get a large cash settlement, but the end result is more money.

There are some benefits of structured agreements for the defendant too. Namely, they allow the company or its insurer to pay a one-time sum for the annuity that will cover the duration and total amount of payments over time. If they purchase the annuity from a third party, like in assigned cases, the claim is off the defendant’s books; they can essentially wipe their hands clean of the settlement.

It’s also tax-free for the assignment companies (the company the defendant purchases the annuity through), making their role in the settlement worthwhile. These benefits work together to present a valuable option for certain types of claims.

What are the Disadvantages of Structured Settlements?

A few aspects of structured settlements could be considered a disadvantage, the biggest of which is the inability to change the agreement once it’s in place. Whatever amount and the schedule of payments are final, so if something unexpected happens that affects the claimant’s financial security, there’s little that can be done – aside from transferring the rights of future payments, which has serious downsides.

Structured settlements work well for personal physical injuries, workplace injuries, and wrongful death, but the tax-free aspect doesn’t cover other parts or types of claims. For example, emotional and punitive damages are taxed, so there’s a limit to what can be included in a structured settlement.

Another potential risk is unknown personal and economic conditions the plaintiff will experience in the future. There may be additional needs – specifically, expensive new treatments or in-home care – that cost more than what’s received through periodic payments. And the settlement could even impact eligibility and support through Medicaid and Medicare.

Transferring the Rights of Future Payments

Structured settlements are pretty much set in stone. They can’t be changed once an agreement is made, such as increasing the periodic payment amounts, fast-tracking the schedule, or requesting a lump sum that wasn’t negotiated in the settlement.

However, there’s an option for claimants to transfer the right of their future payments in return for a lump sum. The rights are transferred to a structured settlement factoring company that becomes the recipient of the remaining payments and provides the injured party with cash, effectively severing their rights. Unfortunately, structured settlement factoring companies have been under fire throughout the years, leading advocates to push for stricter laws and more accountability.

And going this route isn’t great for the claimant because the amount they get is far less than the total value of what remains in the settlement. Luckily, state law requires several conditions to be met when purchasing someone’s structured settlement, including getting a judge’s approval.

Those who choose to sell their periodic payments in structured settlements typically do so because they need money immediately, and the schedule and amount they’re getting aren’t enough. They suffer a significant loss, but for some, it’s a move they need to make because of their unique situation.

Are Structured Settlements Right for You?

While structured settlements aren’t for everyone, the benefits far outweigh the disadvantages in many cases. Since creating the schedule and payment amounts involve negotiations with the defendant, there are ways to protect the plaintiff; considering future conditions, like cost-of-living increases, and identifying potential situations that would require larger amounts of money, can be factored into the agreement. It’s not a guarantee, but it’s a fairly safe and viable option for many.

If you have a personal physical injury, workplace injury, or wrongful death claim, discussing your options with a lawyer and with the advice of a settlement planning firm can help. Financial security now and in the future, combined with better money management, tax-free payments, and a highly customizable agreement process is extremely appealing. Structured settlements can provide peace of mind during a difficult time that can have lifelong ramifications.