Those responsible for the wrong may agree to the settlement on their own, or they may be forced to pay the money when they lose the case in court. If the amount of money is small enough, the wronged party may have the option to receive a lump sum settlement. For larger sums, however, a structured settlement annuity may be arranged. In this case, the at-fault party puts the money toward an annuity, which is a financial product that guarantees regular payments over time from an insurance company.
The agreement details the series of payments the person who was wronged will receive as compensation for the harm done to them. Spreading the money over a longer period of time offers a better future guarantee of financial security because a single payout can be spent quickly.
The U. Modern adoption of these payments can be traced back to Canada in the s when a medication called thalidomide caused birth defects in thousands of children. Rather than receive a one-time payment from the at-fault pharmaceutical company, the claimants needed a series of payments over a longer timespan to cover future medical bills. Structured settlements were first issued in the U.
Settlement payments to the injured party did not count towards their gross income, and thus they were not required to pay taxes on any money received. Likewise, after the recipient passed away, payments to the estate continue to be excluded from taxation.
Structured settlements gained popularity in the s after the U. Congress passed the Periodic Payment Settlement Act of By , the National Structured Settlements Trade Association formed to preserve and promote structured settlements to injury claimants through education and advocacy. Over a decade later, the Small Business Job Protection Act of set limitations on the types of personal damage cases eligible to receive the tax benefits.
Payments from punitive damages were no longer eligible for tax exclusions. Legal settlements can be paid out in a one-time lump sum or through a structured settlement where periodic payments are made through a financial product known as an annuity. The key differences between these settlement options are in the areas of long-term financial security and taxes. When a plaintiff receives a settlement through a one-time lump sum, they might spend it too quickly, robbing them of the long-term financial security that future payments could provide.
Moreover, any interest and dividends earned if the lump-sum were to be invested would be subject to taxes. There are a number of reasons why an individual may receive a structured settlement.
The most common cases include:. Structured settlements — or structured annuities — are both financial products and legal judgments. While they function somewhat like private assets, they are also subject to complex regulations. In assigned cases, a third-party assignment company collects the funds from the defendant, and then purchases the annuity from a different insurance company.
That annuity will fund the periodic payments directly to the claimant. The claimant, or plaintiff, does not control the annuity contract. Conversely, in an unassigned case, the defendant is a property and casualty insurance company that purchases the annuity from a separate life insurance company. The defendant technically owns the annuity, and they name the injured party as the payee. If you elect to receive your lawsuit payout through a structured settlement, you can determine whether to begin to receive the funds immediately or at a later date.
Immediate payments can be beneficial if you require medical care, for example, or have lost your source of income. You may decide to postpone the payments until a later time, such as after you retire.
During the waiting period, the annuity will grow as it earns interest. You can also determine whether the annuity should be paid for the rest of your life, no matter how long that may be, or for a specified number of years, as well as the schedule for receiving payments and the payment amounts and adjustments.
Often, plaintiffs will need money for a variety of expenses before they receive their settlement. If you find your expenses mounting as you await your first structured settlement payment or initial lump sum, you may want to consider pre-settlement funding options to tide you over.
Structured annuities are ideally suited for many different types of cases. Although these scheduled payments offer several advantages, it is important to understand the benefits along with the risks when deciding on any financial investment. That can limit your options if your financial situation changes due to unemployment , illness or other setbacks. However, annuity owners may have the option to get cash in advance of their contract schedules. Owners may sell some or all payments to structured settlement buyers.
Such sales must be approved by a judge. The role of the judge is to decide if the sale is in the best interest of the annuity owner. Other rules may apply depending on the details of your annuity contract and the laws of the state where you live. The Structured Settlement Protection Act of provides federal guidelines on such transactions.
Annuity owners should carefully consider their options before selling payments. You can read more about our commitment to accuracy, fairness and transparency in our editorial guidelines. Click here to sign up for our newsletter to learn more about financial literacy, investing and important consumer financial news.
If you're interested in selling your annuity or structured settlement payments, a representative will provide you with a free, no-obligation quote. Our partners are committed to excellent customer service.
They can help you navigate the legal process of selling. Your web browser is no longer supported by Microsoft. Update your browser for more security, speed and compatibility. If you are interested in selling your payments, call us at Annuities View Subpages. What Is an Annuity? Annuities Explained. My former role was training financial advisors, including for a Fortune Global insurance company. My goal is to help you take the guesswork out of retirement planning or find the best insurance coverage at the cheapest rates for you.
Table Of Contents. Why must Structured Settlements be court-approved? How are structured settlements taxed? Regular payments from structured settlement annuities are tax-free. Can structured settlement payments be sold?
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