Structured Settlements in the USA: Everything You Need to Know

Structured settlements are a popular way to receive compensation in personal injury, workers’ compensation, or wrongful death lawsuits. Rather than receiving a lump sum, plaintiffs receive a series of periodic payments over time. This method ensures long-term financial stability and may offer tax benefits. In this guide, we’ll explore how structured settlements work in the USA, their pros and cons, and how to determine if this option is right for you.

What Is a Structured Settlement?

A structured settlement is a financial agreement in which a claimant agrees to resolve a lawsuit by receiving part or all of their compensation in regular payments over a period of time, instead of a one-time lump sum.

Structured settlements are most commonly used in cases involving:

Personal injury claims
Medical malpractice
Workers’ compensation
Wrongful death
Product liability

How Structured Settlements Work

Here’s how the process usually unfolds:

Settlement Agreement: Both parties agree on a settlement amount.
Annuity Purchase: A portion (or all) of the settlement funds are used to purchase an annuity from a life insurance company.
Payment Schedule: The annuity then pays the claimant over time, based on a fixed schedule (monthly, annually, etc.).
Guaranteed Payments: Payments may be fixed or vary based on certain terms.

Benefits of Structured Settlements

Tax-Free Payments: In most cases, structured settlement payments are tax-free under IRS rules.
Financial Security: Regular payments provide a reliable income stream.
Customization: Payments can be tailored to cover future medical costs, education, or retirement.
Protection from Poor Spending: Reduces the risk of spending all the money too quickly.
No Investment Risk: Payments are guaranteed and not subject to market fluctuations.

Drawbacks of Structured Settlements

Lack of Flexibility: Once the structure is set, it cannot be changed easily.
Inflation Risk: Payments may lose value over time if not adjusted for inflation.
No Access to Lump Sum: You can’t withdraw extra money in emergencies.
Low Returns: Compared to other investment vehicles, structured settlements might have lower growth potential.

When Should You Choose a Structured Settlement?

A structured settlement is ideal when:

You want to secure long-term financial support.
You are dealing with a permanent injury or disability.
You want to avoid the burden of managing a large lump sum.
You have future medical or educational expenses to cover.

Selling Structured Settlements

In some cases, recipients may choose to sell part or all of their structured settlement to a third party in exchange for a lump sum. This process is called a “structured settlement factoring transaction” and is subject to court approval.

Why Sell?

Financial emergencies
Starting a business
Paying off debt

Caution: Selling your settlement may cost you a significant portion of your total benefit due to fees and discounts. Always consult a financial advisor before doing so.

Tax Implications

Under Section 104(a)(2) of the Internal Revenue Code, structured settlement payments from physical injury or wrongful death claims are tax-free. However, if you sell your structured settlement, the lump-sum payment may be taxable depending on the circumstances.

Role of Lawyers and Financial Advisors

A structured settlement can have long-term impacts on your life. That’s why:

Lawyers can negotiate the terms and ensure legal protections.
Financial Advisors can assess your needs and suggest the best structure.
Structured Settlement Brokers can help design a payment plan tailored to your situation.

Top Structured Settlement Companies in the USA

J.G. Wentworth – Known for buying structured settlements and offering cash now.
Peachtree Financial Solutions – Offers structured settlement services and annuity buying.
Stone Street Capital – Focuses on providing financial flexibility to annuitants.
Fairfield Funding – Assists in selling structured settlements for immediate cash.
DRB Capital – Offers lump-sum cash payments for structured settlements.

Final Thoughts

Structured settlements provide a reliable and tax-free way to receive compensation, especially when future financial needs are uncertain. While they may not offer the flexibility of a lump sum, their benefits in providing security and peace of mind are significant. If you or a loved one is considering a structured settlement, consult both legal and financial experts to ensure it fits your long-term goals.