Key Takeaways
- Structured settlements are paid based on an agreement between the injured party and the defendant in a lawsuit.
- To fund the settlement, the defendant buys an annuity from a life insurance company.
- The injured party can choose from various structured settlement payout options to suit their unique situation or circumstances.
- Once funded, you cannot alter structured settlements, and they may yield lower returns compared to other investments.
How Are Structured Settlements Paid Out
Most commonly, defendants pay out structured settlements after both parties in a civil lawsuit agree to the settlement’s terms as a means of resolving the suit. The structured settlement amount is typically based on a dollar amount of damage caused by the injury.
Instead of choosing to take their damages as a single lump-sum payout, the claimant opts for a series of periodic payments that may continue for the rest of their life — or the lifetime of their dependents or other beneficiaries spelled out in the structured settlement agreement.
These payments can cover the ongoing costs of medical bills, long-term care or other needs, and may even provide guaranteed lifetime income for the injured party.
The General Process of Structured Settlement Payouts
- An injury — either intentional or through negligence — occurs.
- The victim files a lawsuit and pursues the claim against the defendant in court.
- The two parties reach a settlement, agreeing to a cash amount and payout.
- The injured party releases the defendant from any further liability as part of the settlement.
- The defendant purchases an annuity from a life insurance company to fund the settlement.
- The life insurance company makes periodic payments to the defendant.
The Flexibility of Structured Settlements
Structured settlements offer nearly unlimited flexibility to meet the needs of injury victims. This means the payout options are nearly unlimited — shaped by the needs of the injured party over time.
Lawyers and insurance companies can craft structured settlements to address specific situations and needs of the person receiving the settlement. This includes protecting their settlement from creditors and generating guaranteed lifetime income.
On the other hand, structured settlements cannot be altered or changed once they are funded. Selling them involves high discount rates and they have a lower return rate than other investment instruments such as stocks.
Read More: How Structured Settlements Work
The Role of Annuities in Structured Settlements
Annuities play a leading role in structured settlement payouts. An annuity provides the actual payments, ensuring a steady stream of income for the recipient. Holding the funds in an annuity helps protect the settlement funds, provides long-term financial security and can be tailored to meet specific needs and future obligations.
Start and End Dates
Your payments can begin immediately, or you may delay your payments to allow for a longer accumulation period. The longer the accumulation period, the greater the value of your settlement will be when you begin taking distributions.
The duration of your payments depends on the terms of your contract, including whether it is a life-only or period certain annuity.
A life-only annuity will continue to pay out for the rest of your life, whereas a period certain annuity will pay you only for the length of time specified in the contract.
In addition to the contract start and end dates, you can negotiate:
- Payment frequency
- Distribution amounts
- Death benefits
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Different Types of Structured Settlement Payouts
Because structured settlement payouts are designed to meet the specific needs of the injured party, there are several different types of structured settlement payouts.
Examples of Common Structured Settlement Payout Types
- Temporary life annuity
- Joint and survivor annuity
- Deferred lump-sum
- Percentage increase annuity
- Step annuities
Temporary Life Annuity
A structured settlement may be paid with a temporary life annuity, also called a life with period certain annuity. This guarantees payments for the life of the recipient or for a specific period of time, whichever is longer.
It guarantees payments for as long as the recipient is alive, but it will not continue paying their beneficiaries upon the recipient’s death.
Joint and Survivor Annuity
Joint and survivor annuities issue payments for as long as the recipient is alive. After their death, the payments continue for the life of the recipient’s beneficiaries.
Payments may be slightly lower, but they tend to last longer.
Percentage Increase and Step Annuities
These are two types of structured settlement approaches aimed at managing inflation and interest rate changes.
Step annuities stabilize structured settlement income by incorporating gradual increases in the payment amounts over a fixed period of time or the recipient’s lifetime.
Percentage increase annuities gradually increase payments by a fixed percentage rather than a fixed amount over time.
Deferred Lump Sum Settlements
Deferred lump sum structured settlements see large payments scheduled at major milestones in the recipient’s life. These might include payments scheduled to pay toward a child’s college education when they turn 18 or those made when the recipient reaches retirement age. Deferring these lump sums can also serve as insurance against inflation.
While some deferred lump sum settlements can be set up for life, most are structured for a specific period of time.
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Types of Cases That Use Structured Settlements
Structured settlements can be used in any lawsuit where someone is awarded damages. They are frequently used in cases involving personal injury, workers’ compensation, medical malpractice and wrongful death.
Personal Injury Cases
Personal injury claims require you to show that someone else was responsible for your injury or illness. Their action could have been deliberate, as a result of their negligence or after they were at fault for an accident.
Structured settlements can provide long-term financial security if your injury requires future medical or long-term care or if it disrupts future earnings.
Workers’ Compensation Cases
Employers may agree to a structured settlement in workers’ compensation cases to avoid long-term financial costs for injuries a worker suffers on the job, especially if the injury may require expensive, long-term care and treatment.
These types of injuries may include:
- Amputations
- Brain and spinal cord injuries
- Injuries resulting in partial or total disability
- Multiple traumas
- Occupational-related lung diseases
- Severe burns
- Vision or hearing loss
Medical Malpractice Cases
According to the American Board of Professional Liability Attorneys, medical malpractice is when a hospital, doctor or other health care worker causes injury to a patient through a negligent act or omission.
A patient’s age may factor into whether a settlement is paid through an immediate lump sum, a structured settlement or a combination of both. Doctors typically have to sign off on a medical malpractice settlement even if their employer, such as a hospital, wants to settle.
Wrongful Death Cases
A wrongful death claim is typically brought by dependents or other family members against individuals or organizations that deliberately or negligently caused the death of another person, according to the Legal Information Institute at Cornell Law School.
Wrongful death structured settlements typically cover:
- Loss of income at the time of death
- Loss of potential future earnings
- Loss of benefits, such as health insurance and pension
- Medical expenses associated with the death
- Funeral and burial expenses
- Loss of spousal companionship
- Loss of parental guidance
- Pain and suffering of the deceased before death
Source: Legal Information Institute
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Factors To Consider When Choosing Payout Options
There are several factors that you and your attorney should consider before deciding what kind of payout option best suits your structured settlement. These include how tax law, your ability to manage money and your behavior toward money all come into play.
Tax Implications
According to the Internal Revenue Code, any compensatory damages in a wrongful death settlement involving a structured settlement are effectively tax-free and not included as part of your gross income.
Proceeds from selling a structured settlement — if you choose to do so in the future — are also tax-free.
Financial Needs and Money Management Skills
Your financial needs due to your injury will help your lawyer decide how to negotiate your structured settlement.
In many cases, structured settlement payments may be an injured person’s main — or only — source of income.
Good financial management skills are essential to handle the funds responsibly and maintain long-term financial stability. You may want to consult a financial advisor to make sure you properly manage your structured settlement payments.
Life Expectancy and Health Conditions
It’s important to take your life expectancy and overall health condition into account when negotiating a court settlement.
Your lawyer may want to negotiate for larger periodic payments over a specific period of time. Or you may want to make sure payments continue to your spouse or other beneficiaries after your death.
Structured Settlement Payout FAQs
Depending on the terms of your contract, your payments may be distributed on a monthly, yearly or quarterly schedule. Payouts may be in fixed amounts or may increase or decrease, according to your needs.
Section 104(a)(2) of the federal Internal Revenue Code excludes damages paid for physical injuries or wrongful death. Punitive damages, however, are not excluded. Therefore, the IRS collects taxes on structured settlement money that was negotiated as part of punitive damages or distress that was not caused by a physical illness or injury. Always consult an attorney or tax professional before making financial decisions with potential tax consequences.
Structured settlement annuities offer highly flexible payout options. But it is crucial to decide on the payout option and schedule at the time of settlement. Once established, the payout schedule is set in stone, and you cannot modify or change payout options.
