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What Is a Structured Settlement?

Despite all the legal language around them, structured settlements are simple. Many lawsuits result in someone or some company paying money to another to right a wrong. Those responsible for the wrong may agree to the settlement on their own, or they may be forced to pay the money when they lose the case in court.

If the settlement is small enough, the wronged party may have the option to receive a lump sum settlement. For larger settlements, however, a structured settlement annuity may .

The structured settlement agreement details the series of payments the person who was wronged will receive as compensation for the harm done to them. Structuring the money over a longer period of time offers a better future guarantee of financial security because a single payout can be spent quickly.

Structured settlements gained popularity in the 1980s after the U.S. Congress passed the Periodic Payment Settlement Act. According to the National Structured Settlements Trade Association, almost $6 billion in new structured settlements are issued annually.

How Do Structured Settlements Work?

A structured settlement pays out money owed from a legal settlement through periodic payments in the form of a financial product known as an annuity. However, many legal settlements offer a lump sum payment option, which provides a one-time sum of money. The key differences between both annuity settlement options are the long-term security and the taxes. For example, money received from a personal injury case is almost always tax free when you receive it. However, once the money is yours, you’re liable for taxes and dividends from the lump sum.

There are a number of reasons why an individual may receive a structured settlement, the most common cases being:

Personal Injury: A personal injury case is a civil case where someone who’s been harmed files a lawsuit seeking money from the person believed responsible for the harm. Money in the form of a structured settlement helps recipient pay for medical expenses or other costs.

Workers’ Compensation: Most people know about workers compensation, which pays out workers who get injured on the job while they recover. Payments can be used for medical treatment and wage replacement during periods when injured employees are unable to work and other expenses.

Medical Malpractice: In some unfortunate cases, doctors can do more harm than good. In this instance, injured patients or the families of deceased patients can sue for medical malpractice.

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