What is a Structured Settlement?

Understanding Structured Settlement Annuities

What is a Structured Settlement?

A structured settlement annuity allows individuals to receive their personal injury, wrongful death, or workers’ compensation settlement in a series of periodic payments. Rather than accepting a one-time, lump-sum payout, claimants can benefit from income tax-free payments that are spread out over time, providing a steady stream of income.

Structured settlements can also be tailored for non-physical injury cases, offering tax-deferred income. This provides financial flexibility, as it allows recipients to manage their funds more strategically, avoiding a large, fully taxable lump-sum payment.

Types of Structured Settlement Annuities

Claimants have several options when setting up a structured settlement annuity, such as:

  • Fixed-Indexed Annuities: Payments are linked to the performance of a market index but include a guaranteed minimum rate of return.
  • Single Premium Immediate Annuities: Offers immediate, regular payments after a single lump-sum investment.
  • Deferred Income Annuities: Allows claimants to start receiving payments at a future date, securing long-term income.
  • Multiple-Year Guarantee Annuities: Provides guaranteed payments for a specified period.

A settlement consultant can help guide claimants through these options to determine which best fits their needs.

How Does the Structured Settlement Process Work?

The decision to establish a structured settlement is made during the settlement negotiations. After agreeing to the settlement details, the claimant releases the defendant or insurance company from liability.

Next, the payout funds are transferred to a third-party assignment company, which assumes responsibility for the settlement. This company then purchases an annuity from a structured settlement provider. Based on the predetermined schedule, the claimant will receive their payments as outlined in the agreement.

Structured settlements can be set up for a wide range of settlement amounts, including cases as low as $10,000. Many individuals prefer structured settlements over lump-sum payments due to their long-term financial advantages.

Benefits of a Structured Settlement

  • Income-Tax-Free Payments for Physical Injury Cases: Under Section 104(a) of the Internal Revenue Code, structured settlement payments for physical injury and wrongful death cases are exempt from federal and state income taxes.
  • Tax-Deferred Payments for Non-Physical Injury Cases: In non-physical injury cases, payments are tax-deferred, allowing the claimant to spread out tax liabilities over time.
  • Guaranteed Income: Structured settlements provide a reliable source of income based on an agreed payment schedule, ensuring financial security for claimants.
  • Guaranteed Rate of Return: The locked-in rate of return shields claimants from the uncertainty of market fluctuations, offering peace of mind and stability.
  • No Additional Fees: With no overhead fees, structured settlements can often compete favorably with other investment options while maintaining preferential tax treatment.

Additional Investment Opportunities

For those interested in diversifying their financial strategies, there are options beyond traditional structured settlement annuities. Claimants can explore market-based structured settlements to customize their income sources further.



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