When you’re navigating the aftermath of a personal injury, the financial compensation you receive can significantly impact your future.
Structured settlements represent a critical option that many injury victims consider, yet they remain widely misunderstood.
This comprehensive guide explores how structured settlements work in personal injury cases, their benefits and limitations, and how they compare to lump-sum payments.
Whether you’re currently involved in a personal injury case or simply want to understand your options better, this information will help you make informed decisions about your financial recovery.
What is a Structured Settlement? Definition and Basic Concepts
A structured settlement is a financial arrangement that provides periodic payments to an injured party as compensation for their injuries, rather than a single lump sum payment.
This arrangement is commonly used in personal injury cases, wrongful death claims, and medical malpractice lawsuits.
The concept emerged in the 1970s and has since become a standard option in the resolution of personal injury claims.
At its core, a structured settlement converts what would be a one-time large payment into a series of smaller, regular payments distributed over time.
These payments are typically funded through an annuity purchased by the defendant’s insurance company from a life insurance company.
The payment schedule is customized based on the plaintiff’s needs and can extend for a predetermined period or for the plaintiff’s lifetime.
The legal foundation for structured settlements in the United States is established in the Internal Revenue Code Section 104(a)(2), which provides tax advantages for personal injury victims who receive compensation through this method.
This tax treatment has made structured settlements an attractive option for many plaintiffs seeking long-term financial security after an injury.
Structured settlements provide injury victims with financial security through guaranteed periodic payments, often creating a more stable recovery path than a single lump sum that might be quickly depleted.
The Legal Framework Behind Structured Settlements
Structured settlements operate within a specific legal framework designed to protect injury victims while providing tax benefits.
The foundation of this framework is the Internal Revenue Code Section 104(a)(2), which explicitly excludes personal injury settlements from gross income for tax purposes.
This tax exemption applies to both lump sum and structured settlements, but becomes particularly advantageous in structured arrangements where even the growth on the principal amount remains tax-free.
The Periodic Payment Settlement Act of 1982 further solidified the legal status of structured settlements, encouraging their use in personal injury cases.
This legislation established the tax rules that continue to govern structured settlements today.
Additionally, most states have enacted Structured Settlement Protection Acts that regulate the sale of structured settlement payment rights to protect recipients from predatory practices.
The legal process of establishing a structured settlement typically involves several key steps:
- Negotiation between the plaintiff and defendant (usually an insurance company)
- Agreement on the total settlement amount
- Creation of a qualified assignment that transfers the obligation to a third party
- Purchase of an annuity to fund the future payments
- Court approval in cases involving minors or incapacitated adults
This legal structure ensures that the settlement provides long-term security for the injured party while relieving the defendant of ongoing payment obligations.
The involvement of qualified assignment companies creates a separation between the defendant and the plaintiff, which can be psychologically beneficial for both parties.
Types of Personal Injury Cases Where Structured Settlements Apply
Structured settlements are particularly common in certain types of personal injury cases where long-term care needs or future medical expenses are anticipated. While they can be used in virtually any personal injury settlement, some scenarios make them especially appropriate.
Medical malpractice claims often result in structured settlements, particularly when the victim requires ongoing medical treatment or has suffered permanent disability.
These arrangements help ensure that funds are available throughout the victim’s lifetime to cover continuing medical needs.
Similarly, cases involving wrongful death frequently utilize structured settlements to provide financial support to surviving family members over time.
Catastrophic injury cases, such as those involving traumatic brain injuries, spinal cord injuries, or severe burns, commonly employ structured settlements.
The substantial compensation in these cases can be better managed through periodic payments that align with long-term care needs.
Product liability cases that result in serious injuries may also utilize structured settlements, especially when the injuries have lifelong implications.
Cases involving minors present another common application for structured settlements.
Courts often require that settlements for children be structured to preserve funds until adulthood, with specific provisions for educational expenses or other needs.
This approach protects the minor’s financial interests until they reach maturity.
Workplace injury cases that extend beyond workers’ compensation benefits may also utilize structured settlements, particularly when the injuries result in permanent disability or reduced earning capacity.
Structured vs. Lump Sum Settlements: A Detailed Comparison
When resolving a personal injury case, one of the most significant decisions you’ll face is whether to accept a structured settlement or a lump sum payment. Each option offers distinct advantages and potential drawbacks that should be carefully considered based on your specific circumstances.
Financial Implications of Each Option
A lump sum settlement provides immediate access to the full compensation amount, offering financial flexibility and the ability to address pressing needs such as medical bills, property repairs, or debt repayment.
This approach gives you complete control over your money and the freedom to invest it as you see fit, potentially generating higher returns than a structured settlement annuity.
However, this freedom comes with responsibility and risk.
Research from the National Endowment for Financial Education suggests that approximately 70% of people who receive large lump sums spend most of it within a few years.
Without careful management, these funds may be depleted before covering all long-term needs related to the injury.
Structured settlements, by contrast, provide guaranteed income streams that can be tailored to match anticipated future expenses.
The payments are tax-free, including any growth or interest earned on the principal amount—a significant advantage over privately investing a lump sum, where investment gains would typically be taxable.
For individuals with limited financial management experience, structured settlements remove the burden of managing a large sum while ensuring long-term financial support.
Long-term Security Considerations
The predictability of structured settlements offers substantial psychological benefits, creating financial stability through guaranteed future payments regardless of economic conditions.
This security can be particularly valuable for individuals with permanent disabilities or ongoing medical needs, as it ensures continued support throughout their lifetime.
Structured settlements can also provide protection against creditors in many jurisdictions and may not affect eligibility for certain means-tested government benefits when properly designed.
This protection can be crucial for maintaining access to programs like Medicaid or Supplemental Security Income.
Lump sum settlements, while offering immediate financial control, expose recipients to potential risks including poor investment decisions, pressure from friends or family seeking loans, or vulnerability to financial predators.
Additionally, a lump sum that’s improperly managed may be exhausted before covering all future injury-related expenses.
The decision between these options should consider factors such as your financial management experience, anticipated future medical needs, current financial obligations, and long-term goals.
Many personal injury attorneys recommend a combined approach—taking a portion as a lump sum to address immediate needs while structuring the remainder to ensure long-term security.
The Mechanics of Structured Settlement Payments
Understanding how structured settlements operate can help you make informed decisions about whether this option suits your needs.
The mechanics involve several key components and processes that work together to create a secure payment system.
Payment Schedules and Options
Structured settlements offer remarkable flexibility in payment design.
Common payment schedules include:
- Monthly payments to replace lost income
- Annual or semi-annual larger payments for recurring expenses
- Lump sum payments at specific intervals for anticipated major expenses
- Educational payments timed to coincide with college or vocational training
- Increasing payments to account for inflation
- Decreasing payments when other income sources will become available
These payments can be scheduled for a fixed period (such as 20 years) or for the recipient’s lifetime, eliminating the risk of outliving the settlement funds.
Some structured settlements include beneficiary provisions that continue payments to family members if the recipient dies before all scheduled payments are made.
Customization options extend to include cost-of-living adjustments (COLAs) that increase payment amounts annually to help maintain purchasing power.
Additionally, some structured settlements incorporate “commutation riders” that allow for the conversion of future payments into lump sums under specific hardship circumstances, adding a degree of flexibility to an otherwise fixed arrangement.
Funding Mechanisms and Annuities
The financial foundation of most structured settlements is an annuity contract purchased from a highly-rated life insurance company.
The defendant or their insurer provides the funding for this annuity, which then generates the scheduled payments to the plaintiff. This arrangement creates separation between the parties while ensuring payment security.
The process typically involves a qualified assignment, where the defendant transfers the obligation to make future payments to a third-party assignment company.
This company then purchases the annuity that will fund the settlement payments. This transfer is significant because it releases the defendant from future payment obligations while providing tax benefits under Section 130 of the Internal Revenue Code.
The selection of the annuity issuer is a critical consideration, as the financial stability of this company determines the security of future payments.
Most structured settlements utilize annuities from insurance companies with high financial strength ratings from agencies like A.M. Best, Moody’s, or Standard & Poor’s to minimize risk to the recipient.
Tax Advantages of Structured Settlements in Personal Injury Cases
One of the most compelling benefits of structured settlements is their favorable tax treatment.
Under Internal Revenue Code Section 104(a)(2), compensation received for personal physical injuries or physical sickness is excluded from gross income.
This exclusion applies to both lump sum settlements and structured settlements, but structured settlements offer additional tax advantages that make them particularly attractive.
While the principal amount of any personal injury settlement is tax-free, the investment gains on that money would typically be taxable if you received a lump sum and invested it yourself.
In contrast, with a structured settlement, all growth on the principal amount also remains completely tax-free.
This means that every dollar you receive from a structured settlement—including the portion representing investment returns—is exempt from federal, state, and local income taxes.
This tax advantage creates a significant financial benefit over time.
For example, a $1,000,000 settlement invested at 4% would generate approximately $40,000 in annual income.
If invested privately after receiving a lump sum, this income would be subject to taxation, potentially reducing the actual return by thousands of dollars each year.
With a structured settlement, the entire amount remains tax-free.
The tax benefits extend beyond just income tax.
- Capital gains taxes
- Alternative minimum tax (AMT)
- Tax on unearned income that might otherwise apply to investment returns
These tax advantages are particularly valuable for plaintiffs with substantial settlements who would otherwise face significant tax burdens on investment income.
According to the National Structured Settlements Trade Association, the tax exemption can effectively increase the real value of a settlement by 25-30% compared to taxable investments with similar returns.
It’s worth noting that these tax benefits apply specifically to qualified structured settlements for personal physical injuries or physical sickness.
Settlements for emotional distress without physical symptoms, punitive damages, or lost wages in employment cases may not qualify for the same tax treatment. This highlights the importance of consulting with a tax professional and structured settlement specialist when designing your settlement.
The Role of Structured Settlement Brokers and Attorneys
Navigating the complexities of structured settlements requires specialized expertise.
Structured settlement brokers and attorneys play distinct but complementary roles in ensuring that injury victims receive optimal financial arrangements tailored to their specific needs.
Structured settlement brokers are financial professionals who specialize in designing and implementing structured settlement plans.
They serve as intermediaries between the plaintiff, the defendant’s insurer, and the life insurance companies that issue the annuities funding the settlements.
These brokers analyze the plaintiff’s current and future financial needs, design appropriate payment schedules, obtain quotes from annuity providers, and facilitate the establishment of the structured settlement.
The broker’s expertise is crucial in several ways:
- They help quantify future medical expenses, lost earnings, and other damages
- They design payment streams that align with anticipated future needs
- They identify the most competitive and financially stable annuity providers
- They ensure all technical requirements are met for tax qualification
Attorneys, particularly those specializing in personal injury, work alongside brokers to protect their clients’ legal interests throughout the settlement process.
While the broker focuses on the financial aspects, the attorney ensures the settlement adequately compensates for all damages and that all legal requirements are satisfied. Personal injury attorneys also help clients understand the implications of different settlement options and negotiate favorable terms with the defendant.
The collaboration between brokers and attorneys is essential for achieving optimal outcomes.
Attorneys bring legal expertise and negotiation skills to secure appropriate compensation, while brokers contribute specialized knowledge of structured settlement products and tax implications. This partnership ensures that settlements are both legally sound and financially advantageous.
Structured settlement brokers typically work on commission paid by the annuity issuer, usually ranging from 3-5% of the premium.
This commission structure means their services don’t reduce the plaintiff’s settlement amount.
However, it also creates a potential conflict of interest, as brokers may have incentives to recommend certain products or companies. Working with a broker who represents your interests exclusively (rather than serving both sides) can help mitigate this concern.
When selecting professionals to assist with your structured settlement, consider their experience, qualifications, and whether they have a fiduciary duty to act in your best interest.
Organizations like the National Structured Settlements Trade Association (NSSTA) provide certification programs for brokers, which can be a useful indicator of expertise and professional commitment.
Negotiating Optimal Structured Settlement Terms
Securing favorable structured settlement terms requires strategic negotiation and careful planning. The terms established during settlement negotiations will affect your financial wellbeing for years or decades to come, making this phase critically important.
Before entering negotiations, conduct a comprehensive needs analysis that accounts for all future expenses related to your injury.
This should include:
- Ongoing medical treatment and rehabilitation costs
- Future medical equipment or home modifications
- Lost earning capacity over your expected career
- Anticipated inflation in medical costs
- Educational expenses for yourself or dependents
- Long-term care needs that may increase with age
Armed with this analysis, you can develop a structured settlement proposal that addresses these specific needs.
Effective negotiation strategies include:
- Requesting multiple payment streams for different purposes (medical, income replacement, education)
- Incorporating cost-of-living adjustments to protect against inflation
- Negotiating for “seed money” as an initial lump sum to address immediate needs
- Including provisions for large lump-sum payments at strategic intervals for anticipated major expenses
- Securing lifetime payments for permanent disabilities or conditions requiring lifelong care
When negotiating with insurance companies, remember that their primary interest is minimizing costs.
They may propose structured settlements with lower present values than lump sum offers, effectively reducing their total payout.
To counter this, work with your attorney to calculate the present value of any structured settlement offer and compare it to lump sum alternatives.
The selection of the annuity provider is another crucial negotiation point.
Insist on highly-rated, financially stable insurance companies to minimize the risk of future payment disruptions.
Your structured settlement broker can provide ratings information from agencies like A.M. Best, Standard & Poor’s, and Moody’s to evaluate potential annuity issuers.
Consider also negotiating for a commutation rider or liquidity provision that would allow access to funds in case of emergency or changed circumstances.
While these features may slightly reduce the payment amounts, they provide valuable flexibility that standard structured settlements lack.
Throughout negotiations, maintain a clear understanding of the tax implications of different settlement structures.
Certain components of settlements, such as punitive damages or interest, may not qualify for tax exemption.
Your attorney and structured settlement broker should work together to maximize the tax-advantaged portion of your settlement.
Remember that the defendant’s insurance company likely has extensive experience with structured settlements.
To level the playing field, ensure you have equally experienced professionals representing your interests during these critical negotiations.
Special Considerations for Minors and Disabled Plaintiffs
Structured settlements take on particular importance when the injured party is a minor or an individual with disabilities. These vulnerable populations benefit from additional legal protections and specialized settlement structures designed to safeguard their long-term interests.
For minors, courts typically require that settlements be preserved until the child reaches adulthood.
Structured settlements provide an effective mechanism for this preservation while allowing for specific disbursements aligned with the child’s needs. Common structures include:
- Small periodic payments during childhood for immediate needs
- Larger payments timed to coincide with educational milestones
- Substantial distributions at ages 18, 21, 25, and 30 to prevent premature depletion
- Provisions for extraordinary expenses like medical treatments or educational opportunities
Court approval is mandatory for settlements involving minors, with judges evaluating whether the proposed settlement serves the child’s best interests.
Many jurisdictions require the appointment of a guardian ad litem—an independent representative who evaluates the settlement solely from the child’s perspective.
For plaintiffs with disabilities, structured settlements must be carefully designed to preserve eligibility for means-tested government benefits like Medicaid and Supplemental Security Income (SSI).
These programs have strict asset and income limits that standard settlement payments could disrupt.
To address this concern, structured settlements for disabled plaintiffs often work in conjunction with special needs trusts.
A special needs trust receives the structured settlement payments and distributes funds for the beneficiary’s supplemental needs without jeopardizing government benefits.
This arrangement preserves access to essential public healthcare and income support while providing additional resources for quality-of-life improvements not covered by government programs.
The coordination between structured settlements and special needs trusts requires specialized expertise in both disability law and structured settlements.
The settlement must be properly designed from the outset, as errors can have severe consequences for benefit eligibility. Key considerations include:
- Directing payments to the trust rather than the individual
- Ensuring the trust is properly established as a first-party special needs trust
- Including provisions for repayment of Medicaid upon the beneficiary’s death
- Selecting an appropriate trustee with experience managing special needs trusts
Selling Structured Settlement Rights: Risks and Regulations
Despite the careful planning that goes into creating structured settlements, circumstances change, and some recipients may later consider selling their payment rights for immediate cash.
This secondary market for structured settlement payments emerged in the 1990s and is now heavily regulated to protect settlement recipients from predatory practices.
If you’re considering selling your structured settlement payments, it’s essential to understand both the process and the substantial risks involved.
The sale of structured settlement payment rights is governed by state Structured Settlement Protection Acts (SSPAs), which typically require:
- Court approval of any transfer of payment rights
- Disclosure of the financial terms, including the discount rate
- A finding that the transfer is in the seller’s best interest
- A waiting period between receiving the offer and finalizing the sale
- Notification to interested parties, including the original annuity issuer
The primary concern with selling structured settlement rights is the significant financial loss involved.
Companies that purchase these rights typically apply steep discount rates—often 9% to 18% or higher—to calculate the lump sum they offer.
This means you might receive only 40-60 cents on the dollar of your future payments’ value. For example, selling $100,000 in future payments might yield only $40,000-$60,000 in immediate cash.
Beyond the financial cost, selling settlement rights eliminates the tax advantages of the original arrangement.
While the original structured settlement payments are tax-free, the investment returns on the lump sum received from selling those rights would be subject to taxation, further reducing the effective value.
The court approval process required by SSPAs provides some protection, but judges may not always have complete information about a seller’s financial situation or alternatives.
Some factoring companies (the businesses that purchase settlement rights) have been criticized for helping customers find friendly jurisdictions with less rigorous review processes.
If you’re facing financial hardship that makes selling settlement rights seem necessary, consider these alternatives first:
- Contact the original structured settlement broker to explore built-in liquidity options
- Investigate loans that use the structured settlement as collateral rather than requiring its sale
- Seek assistance from [nonprofit credit counseling services](https://glenncambre.com/how-to-choose-the-right-insurance-company/)
- Explore whether your settlement contains hardship provisions that allow for accelerated payments
Should you ultimately decide to sell, protect yourself by:
- Obtaining quotes from multiple factoring companies to ensure competitive offers
- Having an independent financial advisor review the terms before proceeding
- Selling only the portion of payments necessary to meet your immediate needs
- Understanding all fees and costs associated with the transaction
Your Path Forward: Making Informed Decisions About Structured Settlements
Navigating the complex landscape of structured settlements requires careful consideration of your unique circumstances, future needs, and financial goals.
As you contemplate your options following a personal injury, remember that the decisions you make now will shape your financial security for years or even decades to come.
Structured settlements offer remarkable benefits for many injury victims, including tax advantages, guaranteed income streams, and protection against premature depletion of funds. However, they also involve trade-offs in terms of flexibility and control over your compensation.
The optimal approach often combines elements of both structured and lump sum settlements, creating a balanced financial plan that addresses both immediate and long-term needs.
Before finalizing any settlement, take these essential steps:
- Work with experienced professionals who understand the nuances of structured settlements and can advocate for your best interests
- Conduct a thorough analysis of your future medical, financial, and personal needs
- Consider how your settlement will interact with other financial resources, including insurance, government benefits, and personal savings
- Evaluate the financial strength of any insurance companies that will be funding your settlement
- Ensure you understand all terms, conditions, and implications of your settlement agreement
Cambre & Associates has extensive experience helping personal injury victims secure favorable settlements that provide lasting financial security. Our team works closely with trusted structured settlement brokers and financial advisors to ensure our clients receive comprehensive guidance throughout the settlement process.
We encourage you to reach out for a consultation if you’re facing decisions about a personal injury settlement.
Our attorneys can help you understand your options, evaluate settlement offers, and develop a strategy that protects your long-term interests.
Don’t navigate these complex waters alone—contact Cambre & Associates today to discuss your case and explore how we can help secure your financial future.
Take the first step toward financial security after your injury by scheduling a free consultation with our experienced personal injury attorneys. Your future deserves the protection that comes from making informed, strategic decisions about your settlement.
Frequently Asked Questions
What tax advantages do structured settlements offer compared to lump sum payments?
Structured settlements for personal physical injuries provide complete tax exemption on both the principal amount and any growth or interest earned over time.
With a lump sum settlement, while the initial amount is tax-free, any investment returns you earn by investing that money would be subject to taxation.
This tax advantage can significantly increase the effective value of a structured settlement compared to a privately invested lump sum, potentially by 25-30% over the life of the settlement according to industry estimates.
Can I access my structured settlement funds early if I face financial hardship?
Standard structured settlements don’t typically allow for early access to funds, as they’re designed to provide guaranteed payments on a fixed schedule.
However, some settlements include “commutation riders” or hardship provisions that permit accelerated payments under specific circumstances.
Without such provisions, accessing funds early would require selling payment rights to a factoring company, which typically involves substantial financial loss and requires court approval under state Structured Settlement Protection Acts.
If you anticipate potentially needing flexible access to funds, discuss including appropriate provisions during the initial settlement negotiations.
How are structured settlements affected by the death of the recipient?
The impact of the recipient’s death depends on how the structured settlement was designed.
Many settlements include “life contingent” payments that stop upon death, while others guarantee payments for a certain period or to beneficiaries.
Some structured settlements include death benefits that pass remaining funds to designated beneficiaries or the recipient’s estate.
This aspect of structured settlements should be carefully considered during design, particularly for recipients with dependents or shortened life expectancies due to their injuries. Your personal injury attorney can help ensure appropriate provisions are included to protect your family’s interests.
How do I protect my structured settlement from inflation over time?
Inflation can significantly erode the purchasing power of fixed payments over long periods.
To counter this, structured settlements can incorporate cost-of-living adjustments (COLAs) that increase payment amounts annually, typically by 2-3%.
Another approach is to design a settlement with graduated payments that increase at predetermined rates over time.
Some settlements use a combination of fixed and variable payments, with a portion invested in equity-indexed annuities that offer some protection against inflation.
Discussing inflation protection should be a priority when designing your structured settlement, particularly for arrangements spanning decades.
How do structured settlements affect eligibility for government benefits like Medicaid and SSI?
Direct structured settlement payments can disqualify recipients from means-tested government benefits like Medicaid and Supplemental Security Income (SSI), which have strict income and asset limits.
To preserve benefit eligibility, structured settlement payments can be directed to a properly established special needs trust rather than to the individual directly.
This arrangement allows the beneficiary to maintain essential government benefits while using settlement funds for supplemental needs not covered by those programs.
This coordination between structured settlements and special needs trusts requires specialized legal expertise to implement correctly, as errors can result in benefit disqualification.
About Cambre & Associates
Cambre & Associates is a premier personal injury law firm serving clients throughout Georgia.
Founded on the principles of client advocacy, professional excellence, and results-oriented representation, our firm specializes in helping injury victims navigate the complex legal landscape following accidents and injuries.
Our experienced attorneys combine deep legal knowledge with compassionate client service, ensuring that each client receives personalized attention and effective representation.
From car accidents and slip and fall injuries to medical malpractice and wrongful death claims, Cambre & Associates fights tirelessly to secure the compensation our clients deserve.
We understand the profound impact that injuries have on our clients’ lives and remain committed to providing exceptional legal advocacy during these challenging times.