What Is a Structured Settlement?
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What Is a Structured Settlement?
Before accepting a structured settlement in a personal injury case, it helps to know how the payment schedule could affect your financial flexibility.
Key Takeaways
- A structured settlement means you get your personal injury settlement in regular payments over time instead of all at once.
- The IRS usually doesn’t tax settlement payments for a physical injury, whether you get the money all at once or through periodic payments.
- After a structured settlement is final, it can be hard to change the payment schedule.
- To get structured settlement payments early, you usually have to sell some future payments to a company that buys them. A court also has to approve the sale.
- Courts often prefer structured settlements for minors so the money doesn't get spent too quickly after the child turns 18.
Before you agree to the final terms of your personal injury settlement, there's one important question to think through: How should the settlement money be paid?
Some people receive their settlement in one lump sum. Others receive part or all of it through scheduled payments that arrive over time. That second option is called a structured settlement, and it can affect how you cover medical bills, replace lost income, plan for future care and manage long-term financial needs.
What is a structured settlement, and why would someone choose it instead of taking all the money at once? The answer depends on the type of injury, the size of the settlement, future expenses and how much flexibility you may need after the case ends.
What Is a Structured Settlement?
A structured settlement pays a personal injury settlement in smaller payments over time instead of one full payment at once. The payment schedule is usually negotiated as part of the settlement. Payments may last for a few years or even the rest of your life.
Insurance companies typically fund these payments by purchasing a structured settlement annuity, which is a financial product designed to release money on a set timetable.
How Does a Structured Settlement Work After an Injury?
Once you and the other side agree on a settlement, or resolve payment terms after a verdict, you decide how much money you want up front and how much you want spread out over time. The defendant's insurer transfers its payment obligation to a separate assignment company, which then buys an annuity from a life insurance company. That insurer sends you payments on the schedule written into your settlement agreement.
For example, a $250,000 personal injury settlement could be structured so you receive $50,000 up front to cover medical bills and immediate expenses. The remaining $200,000 could then be paid as $2,000 per month for 100 months. This gives you some money right away while also creating steady income for the years ahead.
Why Would an Injury Victim Choose a Structured Settlement?
A structured settlement can appeal to someone who wants predictable income instead of managing one large deposit. It can also affect your overall settlement value because the payment schedule controls when you receive the money and how long those payments last.
Several other reasons make a structured settlement worth considering:
- Steady income instead of one large sum to manage
- Lower risk of spending settlement money too quickly
- Payments generally free from federal income tax
- Scheduled settlement payments that can match ongoing medical costs or lost wages
- Payment timing that can support long-term recovery needs
For people with serious injuries, the main benefit is that payments can be built around life after the case. A structured settlement may provide regular monthly income while also allowing larger payments at important times, such as future surgeries, home modifications or periods when working is difficult. That can make the settlement easier to use for the needs it was meant to cover.
What Is the Downside of a Structured Settlement?
The biggest drawback of structured settlements is how inflexible they can be. Once a payment schedule gets set and approved, you generally can't speed up payments or pull out extra money if an unexpected expense comes up. The interest rate built into the annuity also stays fixed, so a strong year in the market won't increase your payout.
If you need cash quickly, your only path is selling part of your future payments to a factoring company. That usually reduces your total payout because the company buys those periodic settlement payments at a discount.
How Long Do Structured Settlements Last?
The length of a structured settlement depends on what gets negotiated as part of your settlement agreement. Some plans pay out over a set number of years, such as 10 or 20, while others continue for the rest of your life.
You can also add a guarantee period, so payments continue to a beneficiary if you pass away before the scheduled settlement payments run out.
Can You Get a Lump Sum Instead of a Structured Settlement?
Most personal injury settlements still get paid as a single lump sum, and a structured settlement is an alternative, not a requirement. You don't have to choose one or the other either.
In fact, some settlement agreements combine both. You may receive an initial lump sum to cover immediate costs like medical bills or lost wages, followed by periodic payments for expenses that stretch further into the future.
Can a Structured Settlement Pay for Future Medical Care?
A structured settlement can be built around anticipated medical needs. If your injury requires ongoing treatment, physical therapy or future surgeries, the payment schedule can be designed to release larger amounts around the times those costs are expected to arise. This ties the money to your recovery timeline instead of leaving you to budget one payment against years of care.
Can a Structured Settlement Be Changed Later?
Once a structured settlement gets finalized, and in many cases approved by a court, the payment terms are locked in. If you later want to access future payments early, you usually have to sell some of your structured settlement payment rights to a factoring company. A court must approve that sale before it can move forward.
States including Arizona, California and Colorado each have statutes requiring a judge to review the sale and confirm it serves your interests before it moves forward.
How Are Structured Settlement Payments Calculated?
Insurers calculate structured settlement payments using the present value of the total settlement, meaning what that money is worth today when paid out gradually with interest. Several factors shape the final numbers.
- The total settlement amount agreed to or awarded
- Life expectancy and expected future needs
- Projected medical costs and lost income
- The discount or interest rate the insurer applies
- How much money you want available up front
These figures work together to set the size and timing of each payment throughout the life of your structured settlement.
Are Structured Settlements Good for Minors?
Courts often favor structured settlements when the injured party is a minor. Rather than releasing a large settlement to an 18-year-old all at once, a structured settlement can schedule payments to arrive at different milestones, such as turning 18, starting college or reaching set ages in adulthood.
Structuring personal injury settlements this way is meant to protect a minor's compensation from being spent quickly before they're prepared to manage it.
Do You Need a Lawyer To Review a Structured Settlement?
Before you agree to a structured settlement, it helps to have someone review the terms, the payment schedule and how the numbers were calculated. A personal injury attorney can look at whether the proposed payment plan fits your medical needs, lost income and long-term expenses before you sign a settlement agreement. Because a structured settlement is nearly impossible to undo once approved, you should know exactly what you are agreeing to before you commit.
Discuss Your Structured Settlement Options With an Experienced Lawyer
Understanding what a structured settlement is can provide valuable clarity when you are evaluating your financial options during an injury claim. At Sargon Law Group, we guide clients across Arizona, California and Colorado through serious accident and wrongful death claims, managing your case with clear, direct communication. Because we work on a contingency fee basis, there are no upfront costs, and you only pay if we secure a recovery for you.
If you want to review your options and see how a specific payment structure might support your long-term recovery, reach out to a personal injury attorney at Sargon Law Group today to schedule your free consultation.