How structured settlements work

When a personal injury lawsuit is settled, the defendant (or their insurance company) purchases an annuity from a life insurance company. This annuity is specifically designed to fund the structured settlement payments. The insurance company then becomes responsible for making the agreed-upon payments to the claimant according to the settlement terms.

The payment schedule can be customized extensively. Some common structures include:

• Level payments made monthly, quarterly, or annually for a set number of years or for life
• Payments that increase over time to account for inflation
• Lump sum payments at specific intervals (for example, a larger payment every five years for ongoing medical procedures)
• Combinations of immediate and deferred payments
• Payments that continue to beneficiaries if the claimant dies before the payment period ends

The terms are negotiated during the settlement process and, once finalized, typically cannot be changed. This inflexibility is both a feature and a limitation of structured settlements.

Types of cases involving structured settlements

Structured settlements most commonly arise in:

• Personal injury cases (car accidents, slip and falls, medical malpractice)
• Wrongful death claims
• Workers’ compensation cases
• Some employment discrimination settlements
• Certain lottery winnings (though these are sometimes called “structured prizes” rather than settlements)

The critical connection: How annuities fund structured settlements

Here’s where the relationship becomes clear: structured settlements are funded by annuities, but not all annuities are structured settlements.

When a structured settlement is established, the responsible party purchases a “qualified assignment annuity” or “structured settlement annuity” from a highly-rated life insurance company. This annuity is specifically designed for this purpose and comes with special characteristics:

• Tax treatment: The annuity payments are tax-free to the recipient in personal injury and wrongful death cases under Internal Revenue Code Section 104(a)(2). This is a significant advantage compared to typical annuity payments, which are usually taxed as ordinary income on the earnings portion.

• Assignment: The obligation to make payments is typically assigned from the defendant to a qualified assignment company, which then purchases the annuity. This legally transfers the obligation away from the defendant while ensuring the claimant’s payments are secure.

• Customization: Structured settlement annuities are tailored to match the exact payment schedule negotiated in the settlement agreement.

• Security: These annuities are backed by the claims-paying ability of the issuing insurance company and are often further protected by state guaranty associations.

Key differences

While structured settlements use annuities as their mechanism, several important distinctions exist:

• Purchase context: A general annuity is typically purchased voluntarily by an individual as part of their financial planning. They choose when to buy it, which company to buy from, and what terms to select. A structured settlement annuity, in contrast, arises from a legal settlement. While the claimant has input into the payment structure during negotiations, they don’t simply walk into a financial institution and purchase a structured settlement annuity independently.

• Tax treatment: This is perhaps the most significant difference. Structured settlement payments for personal injury or wrongful death are entirely tax-free—both principal and earnings. Regular annuity payments purchased for retirement or investment purposes are taxed differently. The portion of each payment representing return of principal is not taxed, but the earnings component is taxed as ordinary income.

• Flexibility and modification: When you purchase a regular annuity for retirement, you typically have options. Many annuities include provisions for withdrawals, loans, or surrender (though often with penalties). Structured settlement annuities, once established, are generally inflexible. You cannot modify the payment schedule, cannot typically take loans against them, and cannot surrender them for cash value. This rigidity is intentional—it protects injury victims from impulsive decisions but can be problematic if circumstances change dramatically.

• Secondary market: The inflexibility of structured settlements has given rise to a secondary market where companies offer to purchase future structured settlement payments for a discounted lump sum. This practice is regulated by federal law (the Structured Settlement Protection Act) and state laws, which typically require court approval to ensure the transaction is in the seller’s best interest. Regular annuities don’t typically have this kind of secondary market because owners already have more flexibility in accessing their funds.

• Purpose and philosophy: Regular annuities are financial products designed for wealth accumulation, retirement income, or investment diversification. Structured settlements are legal solutions designed to provide long-term financial protection for injury victims. The philosophy behind a structured settlement prioritizes security and stability over liquidity and growth potential.

Advantages of structured settlements

Understanding the benefits helps clarify why this arrangement has become standard in personal injury law:

• Guaranteed income: Structured settlements provide certainty. The claimant knows exactly what they’ll receive and when, which facilitates long-term planning, especially for ongoing medical care.

• Tax benefits: The tax-free nature of structured settlement payments can result in substantially more after-tax income compared to taking a lump sum, investing it, and paying taxes on the earnings.

• Protection from poor financial decisions: By spreading payments over time, structured settlements protect recipients from the risk of spending a large sum too quickly. This is particularly valuable for individuals who may have cognitive impairments from their injuries or who lack financial management experience.

• No investment risk: Unlike taking a lump sum and investing it, structured settlement recipients bear no market risk. Their payments continue regardless of stock market performance or economic conditions.

• Creditor protection: In many jurisdictions, structured settlement payments enjoy protection from creditors (with some exceptions for child support and certain other obligations).

Disadvantages and limitations of structured settlements

The arrangement isn’t perfect for everyone:

• Inflexibility: The inability to modify payment terms is the most commonly cited drawback. If circumstances change—unexpected medical expenses arise, opportunities require capital, or family situations shift—the claimant cannot easily access more funds.

• Inflation risk: Unless specifically structured with cost-of-living adjustments (which reduce initial payment amounts), fixed structured settlement payments lose purchasing power over time due to inflation.

• Opportunity cost: In strong market environments, a lump sum invested wisely might generate returns exceeding the structured settlement amount. Of course, the opposite is also true—the market could decline, leaving the claimant worse off.

• Limited transferability: While structured settlement payment rights can be sold in the secondary market, this typically involves significant discounts (often 40-60% of the remaining payment value) and requires court approval, making it a last resort rather than a viable liquidity option.

• No estate value: Depending on how the structured settlement is structured, payments may cease at death, leaving nothing for heirs. While some settlements include survivor benefits, others don’t, which can be problematic for claimants with dependents.

The role of qualified assignment

A crucial component of structured settlements that distinguishes them from simple annuity purchases is the qualified assignment structure. Under federal tax law, a defendant can transfer (assign) their periodic payment obligation to a third party—typically a qualified assignment company affiliated with the life insurance company issuing the annuity.

This assignment serves multiple purposes. It removes the obligation from the defendant’s balance sheet, provides additional security to the claimant (as the assignment company’s sole business is fulfilling these obligations), and preserves the tax-free status of the payments. The qualified assignment company then purchases an annuity to fund its obligation to the claimant.

This three-party structure (defendant, assignment company, insurance company) is unique to structured settlements and doesn’t exist in typical annuity purchases.

When structured settlements make the most sense

Structured settlements are particularly appropriate in certain situations:

• Long-term or permanent disabilities: When injuries require ongoing medical care, adaptive equipment, or personal assistance throughout life, the guaranteed income stream aligns perfectly with these continuous needs.

• Minors: Children receiving settlements benefit greatly from structured payments that mature as they age, potentially providing funds for education, transitioning to adulthood, and long-term support without the risk of guardians mismanaging a lump sum.

• Individuals with limited financial experience: Those without experience managing significant sums of money may be better served by regular payments rather than a potentially overwhelming lump sum.

• Cases with very large settlements: When settlement amounts are substantial, the tax advantages and guaranteed income become increasingly significant, often resulting in substantially more total money received over time compared to a taxable lump sum.

When traditional annuities might be preferred

In contrast, standard commercial annuities purchased outside the structured settlement context might be more appropriate when:

• Flexibility is important: Individuals who might need access to their funds for emergencies or opportunities may prefer annuities with withdrawal provisions or surrender options.

• Investment goals are primary: Those seeking to maximize returns and willing to accept market risk might choose variable annuities or other investment vehicles.

• The annuity is one component of a diversified strategy: Retirees building a comprehensive financial plan often purchase annuities to guarantee a portion of their income while keeping other assets invested for growth and liquidity.

• Tax situations differ: Since most annuity purchases for retirement or investment purposes don’t qualify for the tax-free treatment that structured settlements receive, the tax analysis differs significantly.

The takeaway

So, are structured settlements and annuities the same thing? No—but they’re inextricably linked.

Whether a structured settlement or a standard annuity better serves a particular individual depends entirely on their situation—the context in which they’re receiving money, their long-term needs, their tax situation, their desire for flexibility versus security, and their overall financial goals. In the personal injury context, structured settlements have proven their value over decades by providing stable, secure income to countless individuals who depend on those payments for their ongoing care and quality of life. In the retirement context, annuities offer tools for managing longevity risk and creating reliable income streams that can complement other retirement savings.

The key is recognizing that while these terms are related, they represent different aspects of financial planning and legal settlements, each with its own appropriate applications, advantages, and limitations.

Let Peachtree help

While Peachtree Financial Solutions does not provide structured settlement consulting services, we have helped thousands of people who already have structured settlements get their money sooner by purchasing their future annuity payments for a lump sum of cash. Selling your payments is a regulated process and we have a lot of experience with these transactions. And while every annuity is unique, which means every payment sale will be different, they all have the same basic five steps:

• Call one of our representatives.
• Receive a free, no-obligation quote for the sale of your payments.
• Review and sign the purchase agreement.
• We process the agreement with your insurance company.
• You get your cash!

Why should you choose Peachtree?

It’s all part of something we call the Peachtree Promise: our experienced, dedicated representatives listen to your goals and clearly explain your available options. We meet you where you are without judgement and work hard to help you meet your financial goals. Getting your quote is completely free, and you’re under no obligation to sell to us if you aren’t completely satisfied with what you hear.

For anyone navigating a personal injury settlement, the expertise a qualified structured settlement consultant offers can be invaluable, potentially making the difference between temporary financial relief and lasting financial security. By understanding how these professionals work and the value they add, settlement recipients can make more informed choices about their financial futures.

This information is provided for educational and informational purposes only. Such information or materials do not constitute and are not intended to provide legal, accounting, or tax advice and should not be relied on in that respect. We suggest that You consult an attorney, accountant, and/or financial advisor to answer any financial or legal questions.