A structured settlement is a financial arrangement that provides injured claimants with regular payments over time instead of receiving their legal settlement in a single lump sum.
These agreements are commonly used in personal injury, wrongful death, and workers’ compensation cases, and they are typically funded through annuities purchased by the defendant’s insurance company.
In this comprehensive guide, we’ll explain:
- How structured settlements work
- Common case types that result in structured settlements
- Tax rules and funding mechanisms
- When and how you can sell your payments
- Legal protections and best practices
- Alternatives to selling and long-term financial implications
Whether you’re considering accepting a structured settlement or exploring your options for cashing out, this guide will help you make informed decisions and protect your financial future.
What Is a Structured Settlement?
A structured settlement is a type of legal settlement that pays out compensation through a series of scheduled payments over time instead of a one-time lump sum. These regular payments—typically monthly or annually—are designed to provide long-term financial support.
Structured settlements are commonly used in personal injury, wrongful death, and workers’ compensation cases. The payment plan is negotiated during the settlement process and is usually funded by an annuity purchased from a licensed insurance company.
How Does a Structured Settlement Work?
A structured settlement works by paying a legal settlement through regular installments over time rather than a single lump-sum payment. In most cases, the defendant or their insurance company purchases an annuity from a licensed insurer to fund these payments.
For example, if someone wins a $500,000 car accident settlement, they may receive $2,500 per month for 20 years instead of getting the full amount upfront. This structure helps cover long-term medical expenses, lost income, or living costs.
The terms of the structured settlement—including the amount, schedule, and duration—are outlined in the settlement agreement. These terms are usually fixed and cannot be changed, unless the recipient legally sells or transfers their future payments with court approval.
What Types of Cases Result in Structured Settlements?
Structured settlements are used in a wide range of legal cases:
- Personal Injury Cases: These often result in structured settlements, especially when the injuries are severe and require long-term medical care.
- Workers’ Compensation Cases: If an employee is injured on the job and cannot work for a long period of time, they may be awarded a structured settlement to cover lost wages and medical expenses.
- Medical Malpractice Cases: If a healthcare provider is found at fault for a patient’s injury or illness, the patient may be awarded a structured settlement.
- Product Liability Cases: If a defective product causes harm to a consumer, the manufacturer may be required to pay a structured settlement.
- Auto Accident Cases: Victims of serious automobile accidents may be awarded structured settlements to cover medical bills, property damage, and other costs.
- Slip and Fall Cases: These cases, which often occur on commercial properties, can result in structured settlements if the injured party can prove negligence on the part of the property owner.
- Birth Injury Cases: A structured settlement may be awarded to cover lifetime care costs if a child suffers injury during birth due to medical negligence.
They may also be used in sexual abuse or harassment cases, and wrongful termination claims, when financial or emotional damages are awarded.
Why Choose a Structured Settlement Over a Lump Sum?
Structured settlements provide predictable, steady income and help prevent recipients from mismanaging a large payout. For individuals with medical issues or disabilities, the guaranteed payments offer a reliable financial lifeline.
These settlements are often tax-free under federal law when tied to physical injuries or wrongful death claims. In contrast, income from investing a lump sum may be taxable and risky without proper planning.
While lump sums give full access to the money, they require strong financial discipline. Structured settlements remove the temptation to overspend and offer long-term security instead.
Pros and Cons of Structured Settlements
| Pro/Con | Details |
|---|---|
| ✅ Pro: Steady Income Stream | Provides predictable, tax-free payments on a monthly or annual schedule, supporting long-term financial needs. |
| ✅ Pro: Tax Advantages | Payments for personal injury or wrongful death are generally exempt from federal income tax under IRS rules. |
| ✅ Pro: Protection from Overspending | Spreading out the funds helps prevent recipients from quickly spending a lump sum. |
| ✅ Pro: Customizable Payment Schedule | Settlements can be tailored to include delayed payments, lump-sum milestones, or life-contingent payouts. |
| ❌ Con: Limited Flexibility | Once finalized, payment terms are fixed and usually cannot be changed without court approval. |
| ❌ Con: Inflation Risk | Fixed payments may lose purchasing power over time unless the annuity includes a cost-of-living adjustment. |
| ❌ Con: Limited Access to Large Sums | In emergencies, accessing additional funds requires selling future payments, which involves legal approval and potential discounts. |
| ❌ Con: May Not Be Ideal for Financially Savvy Investors | Individuals capable of managing a large lump sum might prefer full access to invest or grow their money. |
Can I Receive a Portion of My Settlement as a Lump Sum and the Rest as Structured Payments?
Yes, many structured settlements allow for a hybrid payment structure. You can receive an initial lump sum to cover immediate expenses—such as medical bills or legal fees—followed by scheduled payments over time. This option provides both upfront financial relief and long-term income stability.
How Are Structured Settlement Payments Funded?
These payments come from annuities, purchased from insurance companies. The defendant pays a lump sum to the insurer, which then guarantees the future payments.
Annuities are low-risk financial products designed to provide fixed payments over a specified period. Once the contract is signed, the payout amounts and schedule are locked in.
Some settlements may include both a cash portion upfront and annuity payments over time. The terms vary depending on the agreement and the claimant’s financial needs.
Are Structured Settlement Payments Taxable?
No, payments from structured settlements for physical injuries or wrongful death are generally tax-free under U.S. law. This includes both the original settlement amount and the periodic payments.
Exceptions include any portion of the settlement involving punitive damages or interest, which may be taxable. Payments for non-physical claims, such as emotional distress not tied to injury, could also be subject to tax.
Selling a structured settlement for a lump sum may trigger tax liabilities. It’s important to consult a tax professional before making changes.
Can You Sell Your Structured Settlement Payments?
Yes, you can sell your future structured settlement payments, but it’s not a quick or simple process. You must get court approval, and the sale must be in your best interest.
People usually consider selling when they face financial emergencies, such as medical bills, debt, or job loss. Factoring companies buy the rights to future payments at a discount and offer a lump sum in return.
You don’t have to sell the entire settlement—some people sell just a portion of their payments. Still, the value offered is usually less than what you would have received over time.
Courts review the seller’s financial situation and may deny the sale if it appears risky or unfair. Transparency and legal protections are required by law to prevent abuse.
What Is a Structured Settlement Factoring Company?
A structured settlement factoring company buys the rights to future structured settlement payments in exchange for a lump sum of cash. These companies offer to purchase part or all of a recipient’s payment stream—usually at a discount—and must obtain court approval to complete the transaction legally.
What Is the Process for Selling Structured Settlement Payments?
The process for selling structured settlement payments typically includes the following steps:
- Evaluate Your Financial Need: Before you decide to sell your structured settlement payments, think about why you need to do this. You might need a large sum of money for a down payment on a house, to start a business, to pay for education, or to deal with an emergency. However, selling your structured settlement payments can have long-term financial consequences, so it’s not a decision to be made lightly.
- Seek Professional Advice: Consult with a financial advisor or attorney to understand the implications of selling your structured settlement payments.
- Choose a Reputable Company: If you decide to sell your payments, choose a reputable company that specializes in buying structured settlements. Check the company’s reputation and reviews online.
- Get a Quote: The company will provide a quote on how much they will pay for your future payments. The amount you receive will be less than the total of your future payments, as the company needs to make a profit and cover its risk.
- Review the Offer: Once you receive the offer, review it carefully. Make sure you understand all the terms and conditions.
- Go to Court: In the U.S., selling structured settlement payments requires court approval. The judge needs to determine that selling your payments is in your best interest.
- Receive Your Money: If the judge approves the sale, the structured settlement purchasing company will give you a lump sum of money in exchange for your future payments.
This can be a lengthy process, taking anywhere from 45 to 90 days.
Can I Cancel the Sale of My Structured Settlement After Signing an Agreement?
Yes, in some states, you may cancel the sale within a legal “cooling-off period” after signing the agreement. This period varies by state—typically 3 to 10 days—and must be disclosed in writing. After court approval, cancellation is much harder. Always review your state’s cancellation rights before finalizing the sale.
What Legal Protections Exist for Selling Structured Settlements?
Selling structured settlement payments is heavily regulated under federal and state laws to protect recipients from exploitation and financial harm.
The sale of structured settlement payments is regulated by state law, backed by federal tax enforcement, and reinforced by general consumer protection statutes.
State Structured Settlement Protection Acts (SSPAs):
All 50 states and Washington, D.C., have enacted SSPAs that require court approval before any sale can proceed. Judges must determine that the transaction is in the seller’s best interest, often considering the seller’s financial need and any dependents. These laws may also include mandatory disclosures, waiting periods, and cancellation rights to ensure transparency.
Federal Oversight via IRC §5891:
While there is no separate federal court process, the Internal Revenue Code §5891, enacted in 2002, enforces compliance by imposing a 40% excise tax on the purchaser if the sale is not approved under applicable state law. This tax provision ensures that factoring companies follow state-mandated procedures.
Consumer Protection Laws:
General state and federal consumer protection laws prohibit deceptive practices and require that sellers receive clear, complete, and truthful information before selling their settlement rights. These protections help safeguard vulnerable individuals from predatory offers or misleading sales tactics.
What Are Your Legal Rights Regarding Structured Settlements?
Structured settlements are commonly used in personal injury, wrongful death, and workers’ compensation cases, where the defendant’s insurer agrees to make scheduled payments to the claimant over time. While the specifics vary by jurisdiction and individual case, here are the general legal rights most structured settlement recipients have:
Right to Full Disclosure
You have the right to receive clear information about the terms of the structured settlement. This includes the payment schedule, total payout amount, and any associated conditions. When selling your future payments, most states legally require written disclosures outlining how much you’ll receive and the true cost of the transaction.
Right to Legal Representation
You have the right to consult with an attorney before agreeing to or selling a structured settlement. While not always required by law, having legal representation ensures you understand the terms and whether the agreement serves your best interest.
Right to Sell Payments
You may sell your structured settlement payments for a lump sum, but only with court approval. The judge must determine that the sale is in your best interest, especially if you rely on the payments for living or medical expenses. The buyer typically pays less than the total future value.
Right to Make an Informed Decision
Before accepting a structured settlement or selling your payments, you have the right to understand your options and the potential financial consequences. This includes the impact on taxes, benefits like Medicaid or SSI, and long-term income stability.
Right to Limited Flexibility
Most structured settlements are legally binding and cannot be changed once finalized. However, you may be able to sell part or all of your future payments with court approval. Some agreements may include built-in provisions (like lump-sum distributions at certain milestones), but these must be part of the original terms.
Right to Court Oversight (in Specific Cases)
Court approval is generally required when a structured settlement involves a minor, a legally incapacitated adult, or when a recipient seeks to sell or transfer future payments. This judicial oversight helps ensure that the financial decision is fair, necessary, and in the best interest of the person receiving the settlement.
Right to Cancel a Sale (Not the Original Agreement)
If you’re selling structured settlement payments, many states provide a cooling-off period (usually 3 to 10 days) during which you can cancel the sale without penalty. However, this does not apply to the original settlement agreement, which is typically final once signed and approved.
How Does Selling a Structured Settlement Affect Your Financial Future?
Selling your structured settlement can solve short-term financial problems, but it may harm your future financial security. The lump sum is almost always less than the total value of your payments.
You lose the steady, long-term income stream that may have been supporting your living or medical expenses. Once spent, the money cannot be recovered, and reestablishing a financial safety net may be difficult.
It’s essential to carefully assess whether the immediate benefit outweighs the long-term risk. Financial advice is crucial.
What Are the Alternatives to Selling Structured Settlement Payments?
If you need cash but want to keep your structured settlement intact, several alternatives can help meet your financial needs without selling your future payments:
Take Out a Loan:
Rather than selling your structured settlement payments, you can apply for a personal or secured loan through a bank or credit union. This allows you to cover urgent expenses while continuing to receive your structured payments.
Invest Your Existing Funds
If you have savings or access to other capital, consider investing in a low-risk or income-generating opportunity. This strategy can potentially grow your finances over time and reduce your reliance on future settlement funds.
Borrow Against Your Settlement
Some specialty finance companies offer loans or cash advances secured by structured settlement payments. These deals are not traditional loans and often resemble factoring arrangements that require a partial transfer of payment rights. Read all terms carefully, and consult a financial advisor to avoid unintentionally selling your settlement.
Convert to a Different Annuity
In some cases, you may be able to restructure or convert your current settlement annuity into another annuity type that offers more flexible or higher income. This option depends on the insurer’s policies and original contract terms.
Rent Out Property
If you own real estate, renting it out can create passive income to help cover expenses. It’s a reliable alternative for supplementing cash flow while keeping your settlement untouched.
Earn Extra Income Through Freelancing or Part-Time Work
Taking on a side job or freelance work can provide short-term financial relief and reduce the temptation to cash out your structured settlement early.
Try Crowdfunding or Peer-to-Peer Lending
Depending on your situation, crowdfunding platforms (like GoFundMe) or peer-to-peer lending networks may help raise the funds you need without involving your structured settlement.
Use Strategic Saving and Budgeting
Tightening your budget and adopting smart saving strategies can free up cash over time. While this option requires discipline, it’s a cost-free way to preserve your long-term financial stability.
How to Determine If Selling Your Structured Settlement Is the Right Decision?
To decide if selling is right, start by evaluating your financial goals and needs. Are you trying to solve a temporary issue, or is this part of a long-term plan?
Compare the total value of your payments with the lump sum offered. Take into account any legal fees, taxes, or loss of future income.
Consult a financial advisor before making a decision. They can help you calculate the trade-offs and identify better options if available.
Best Practices and Industry Oversight
Beyond court-mandated protections, industry best practices and voluntary oversight help promote ethical behavior and accountability in the structured settlement factoring industry.
National Association of Settlement Purchasers
The National Association of Settlement Purchasers (NASP) is a trade organization that represents companies engaged in buying structured settlement payment rights. NASP advocates for best practices that prioritize:
- Transparency in pricing and disclosures
- Informed consent from sellers
- Respect for court authority and the integrity of the approval process
While NASP has no regulatory power and membership is strictly voluntary, affiliation with the organization can signal a company’s willingness to follow ethical standards and operate responsibly within the industry.
Why Best Practices Matter:
Legal compliance sets the minimum standard for structured settlement transfers, but best practices go further by:
- Encouraging clear communication and fair negotiation
- Reducing the risk of predatory offers or misleading tactics
- Supporting a more transparent and professional marketplace
For sellers, working with a company that follows industry best practices—whether through NASP or internal guidelines—adds another layer of confidence beyond what the law requires.
Can You Modify the Terms of a Structured Settlement?
Yes, you can modify the terms of a structured settlement, but it largely depends on the specific terms of your agreement. Some structured settlements may not allow changes once the agreement is finalized.
However, you can sell your future payments for a lump sum of money if you need immediate cash. This process involves going to court and getting a judge’s approval.
It is recommended to consult with a financial advisor or lawyer before making such decisions, as it could have potential tax implications and other long-term financial consequences.
What Happens to a Structured Settlement If the Recipient Dies?
If the recipient of a structured settlement dies:
- Guaranteed payments continue to a beneficiary or the estate.
- Life-contingent structured settlement payments end at death.
Always check the structured settlement agreement or annuity contract to confirm what happens after the recipient’s death.
What Happens If the Annuity Provider Defaults?
If the insurance company funding your annuity defaults, your payments may stop. While rare, this risk exists and can cause serious financial disruptions.
Fortunately, each U.S. state has a guaranty association that provides limited protection to annuity holders. These associations may cover missed payments up to a certain amount.
Before agreeing to a settlement, check the financial rating of the insurer. Choose a provider with a strong reputation to reduce the risk of default.
