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What Are Structured Settlements and How Exactly Do They Work?

If you’ve ever been a victim of personal injury then you know all about the importance of structured settlements and how they help the victims of these events.

Thankfully, most people have never been part of a structured settlement. Those people might be asking “what is a structured settlement?” They have become a favorite way to find a resolution to wrongful death and injury for decades.

Like anything, there are pros and cons of structured settlements but overall they are a great thing for anyone who is involved in a personal injury or death.

Keep reading to learn about how structured settlements work and the benefits of choosing one for your form of resolution.

What Are Structured Settlements?

A structured settlement is a stream of payments paid as damages to someone for relief of liability. It is usually customized to fit the needs of the plaintiff.

A good way to think of structured settlement payments is a river or stream of income. It is similar to the pay that you get from a job except that you can’t get fired and the pay terminated.

How Do Structured Settlements Work?


Structured settlements depend on whether the plaintiff wants to accept a large lump sum of money or if they would rather spread the payments over a specific period of time.

For example, instead of receiving one large payment of $1,000,000, you could accept payment in the form of ten payments of $100,000 every year over the course of ten years.

The best part of a structured settlement is that you can choose a design that fits your needs the best. Here are some common structured settlement payment packages that you can check out.

Large Initial Payment

If you’ve been out of work for a while because of your personal injury and you have bills that have been adding up, a large initial payment might be your best option.

Choosing this option could help you pay off a mortgage or car payment and take care of any bills that have accumulated. Then you can use the subsequent payments that are smaller to fill in for the loss of income.

Additional Amounts for Extraordinary Expenses

Some people who have been victims of personal injury opt for settlements that will take care of their college tuition. The college tuition gets paid for but the victim still receives yearly income in addition to the tuition payments.

Payments That Increase Over Time

Another option is to choose payments that increase over time. These payments start on the lower end for the first few years before increasing to a more significant amount of yearly income every year.

Payments That Decrease Over Time

This option of structured settlement payment is great for those who expect to be making more money from their job in the future. These payments start out by paying a lot of the money that is owed.

The payments then begin to taper off as time goes by to be a supplement from the income that you receive from your job or career.

Delayed Payments

Other people who suffer from personal injury decided that delayed payments are what is best for them. Delayed payments are best for those who don’t want to receive their payment until they reach retirement.

Structured Settlements: The Pros and Cons

There are a lot of benefits that come with structured settlements. A steady and guaranteed yearly income is one of the biggest benefits that you’ll get. Despite that, it is important to weigh the pros and cons of structured settlements.

Every person has different goals for their money and income. It is up to you to decide if a structured settlement is the best choice for your situation. If you’re unsure, talking to an attorney for guidance is a good approach to take.

The Pros

One of the biggest pros of deciding on a structured settlement is that the money that you receive is not subject to income tax. Some structured settlements accrue interest but are still untouchable to tax collectors.

Structured settlement payments also will not have any effect on your eligibility for Medicaid or Social Security Disability. The payments shouldn’t alter your retirement plans or future healthcare coverage during retirement.

If the victim passes away before the payments are completed then they can direct the payments to the beneficiary of their choice. Any further payments owed are guaranteed and remain tax-free.

You also have an amazing amount of flexibility for scheduling payments. You can defer payments until years down the road or you can start receiving payments immediately.

You also choose how long you want to receive payments. If you want lower dollar amounts over the course of 30 years then you are able to schedule payments that way.

Because you can spread payments out, it is great if you fear that you’ll give in to impulse and make large purchases. It will help you reign in your spending and ensure that you save your settlement payments.

Best of all, the payments are guaranteed through the insurance company that issued the annuity. You’ll never have to worry about not receiving the money you’re owed.

The Cons

The downside to structured settlements is that once the terms are agreed upon there is little wiggle room to make changes to meet your needs. If the economy or your financial situation changes you can’t negotiate changes.

Another negative to structured settlement payments is that, in the case of an emergency, the funds are immediately accessible for use.
If you pull money out of your payment plan without selling payments it will cost you a lot of money. This is especially true if you do so before the age of 59.5 years old. It will make the money subject to IRS penalties.

There are also some parts of the payments that are taxable. Attorney fees and punitive damages are subject to IRS tax oversight.

Lastly, not every state has requirements to release its fees for the establishment of a structured settlement. Since you aren’t subject to this information, choosing a structured settlement could end up costing you a lot of money over other options.

Are Structured Settlements Right for You?

There are many situations where structured settlements are the right choice when you’ve been the victim of a personal injury. If you need to pay for college tuition and still want a yearly income then structured settlements are a great choice for you.

They can be spread out over any number of years and even be passed on to a beneficiary. They can also be received immediately and in lump sum form.

Depending on the state you live in, they may have some cons like not knowing the state’s fees for structured settlements. Additionally, attorney fees are subject to taxes by the IRS.

For more informative posts about everything from business to health and home improvement, be sure to check out more blog posts at Fox News Flip.

Cheryl Henson

Cheryl Henson is a passionate blogger and digital marketing professional who loves writing, reading, and sharing blogs on various topics.

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