What Is a Structured Settlement? How It Works, Benefits, and Your Options

A structured settlement is a court-approved financial arrangement that pays compensation from a lawsuit as a series of periodic payments over time, rather than a single lump sum. The payments are funded through an annuity purchased from a life insurance company (such as MetLife, Allstate, or John Hancock) and are tax-free under IRC Section 104(a)(2) when they arise from personal physical injury or physical sickness claims. Structured settlements are most common in personal injury, wrongful death, and workers' compensation cases.

If you have received a structured settlement, or you are about to, understanding how it works, what your options are, and whether you can sell your payments is essential to making informed financial decisions. You can sell some or all of your future payments for a lump sum of cash through a court-supervised process that takes 30 to 60 days.

What Is a Structured Settlement?

A structured settlement is a legally binding agreement that resolves a lawsuit or insurance claim by paying the claimant in scheduled installments rather than a one-time lump sum. The payments are designed to provide long-term financial stability, particularly in cases involving serious injuries that require ongoing medical care, lost wages, or lifelong support.

Here is how the basic mechanics work: when a personal injury or wrongful death case is settled, the defendant (or, more commonly, the defendant’s insurance company) agrees to fund the settlement. Instead of writing a single check, the insurer purchases a qualified funding assignment annuity from a life insurance company such as MetLife, Prudential, New York Life, or Pacific Life. That annuity then makes scheduled payments directly to the claimant according to the terms of the settlement agreement.

The claimant does not own the annuity directly. Instead, a third-party assignment company holds the obligation, and the life insurance company guarantees the payments. This structure ensures that the payments are secure and backed by the financial strength of a rated insurance carrier.

Structured settlements became widespread after Congress passed the Periodic Payment Settlement Act of 1982, which formalized the tax advantages of receiving settlement proceeds over time. Today, they are used in a wide variety of cases, including automobile accidents, medical malpractice, product liability, lead paint exposure, sexual abuse claims, and workers’ compensation injuries.

How Structured Settlements Are Created

The process of creating a structured settlement involves several steps, typically during the negotiation phase of a lawsuit or insurance claim:

1. Settlement negotiation. The plaintiff and defendant (or their insurers) agree on a total settlement amount. The plaintiff’s attorney and a structured settlement consultant work together to design a payment schedule that meets the claimant’s long-term needs.
2. Payment schedule design. The payment schedule is customized to the claimant’s situation. It can include monthly or annual payments, lump sums at specific future dates (for example, to fund college or retirement), increasing payments to keep pace with inflation, or any combination of these.
3. Court approval. In many cases, especially those involving minors or incapacitated individuals, the court must approve the settlement terms. The judge reviews the payment structure to confirm that it serves the claimant’s best interests.
4. Annuity purchase. The defendant’s insurer funds the settlement by purchasing an annuity from a life insurance company. The cost of the annuity is typically less than the total nominal value of the payments, because the insurer benefits from the time value of money.
5. Payments begin. Once the annuity is in place, payments flow to the claimant on the agreed schedule. Payments may begin immediately or be deferred to a future start date.

One of the most significant advantages of this structure is the tax treatment. Under Internal Revenue Code Section 104(a)(2), payments from a structured settlement for physical injury or physical sickness are completely tax-free, including the investment growth on the annuity. This means the claimant receives more money over time compared to investing a lump sum and paying taxes on the returns. For a deeper look at how taxes apply, see our guide on structured settlement tax implications.

Structured Settlement vs. Lump Sum Settlement

One of the first decisions a claimant faces is whether to accept a structured settlement or a lump sum. Each option has distinct advantages and drawbacks, and the best choice depends on the individual’s financial situation, discipline, and long-term needs.

Factor	Structured Settlement	Lump Sum Settlement
Tax treatment	Tax-free (physical injury, IRC 104(a)(2))	Lump sum itself is tax-free, but investment returns are taxable
Control over funds	Limited, payments arrive on a fixed schedule	Full control immediately
Investment flexibility	Cannot invest the full amount; annuity return is fixed	Can invest in stocks, real estate, business, etc.
Risk of overspending	Low, built-in spending discipline	High, studies show lump sums are often depleted within 5 years
Long-term security	Guaranteed income stream for years or life	Depends on investment performance and spending habits
Creditor protection	Protected from creditors in most states	Generally accessible to creditors once received
Inflation protection	Can include increasing payments; otherwise fixed	Can invest to outpace inflation
Flexibility for emergencies	Cannot access future payments immediately (but can sell)	Cash is available for any need

When a structured settlement makes sense: The claimant has long-term medical needs, is a minor, has limited financial experience, or wants guaranteed income without investment risk. Structured settlements are especially valuable for catastrophic injury cases where lifetime care is needed.

When a lump sum makes sense: The claimant is financially experienced, has a specific investment opportunity, needs to pay off substantial debts, or wants full control over the funds. Lump sums may also be preferable in smaller settlements where the administrative cost of a structured settlement is not justified.

Types of Structured Settlement Payments

Not all structured settlement payment streams are the same. The type of payment you receive affects your financial planning, your ability to sell payments, and the value a buyer will offer. There are three main types:

• Guaranteed payments (period certain). These payments are guaranteed for a specific number of years regardless of whether the claimant is alive. If the claimant dies before the guaranteed period ends, the remaining payments go to their estate or designated beneficiary. For example, a 20-year period certain annuity guarantees 20 years of payments no matter what. These are the most common type and the easiest to sell.
• Life contingent payments. These payments continue only as long as the claimant is alive. If the claimant dies, payments stop immediately and nothing goes to heirs. Life contingent payments are harder to sell because the buyer assumes mortality risk. Learn more about life contingent structured settlements and how they differ from guaranteed payments.
• Combination payments. Many structured settlements combine guaranteed and life contingent elements. For example, a settlement might guarantee payments for 20 years and then continue for the claimant’s lifetime after that. The guaranteed portion is straightforward to sell, while the life contingent tail is more complex.

Benefits of Structured Settlements

Structured settlements offer several powerful advantages that make them an attractive option for resolving legal claims:

• Tax-free income. Under IRC 104(a)(2), structured settlement payments for personal physical injury or physical sickness are generally tax-free, including the investment growth within the annuity. Settlements for non-physical claims may be taxable, consult a tax professional.
• Protection from overspending. Research consistently shows that large lump sum payments are frequently spent within a few years. Structured settlements impose automatic discipline by distributing money over time, ensuring funds are available for future needs.
• Creditor protection. In most states, structured settlement payments are protected from creditors, judgments, and garnishment. This means that even if the claimant faces financial difficulties, their settlement income remains intact.
• Predictable income. Knowing exactly how much money will arrive and when makes budgeting and financial planning straightforward. This is particularly valuable for individuals with ongoing medical expenses or those who rely on the payments as their primary income.
• Payments can increase over time. Structured settlements can be designed with built-in escalations, for example, payments that increase by 3% annually to help offset inflation. This provides purchasing power protection that fixed payments alone do not offer.
• Security backed by rated insurers. Payments are guaranteed by highly rated life insurance companies, providing a level of safety that few investment options can match.

Disadvantages of Structured Settlements

Despite their benefits, structured settlements are not perfect for every situation. Here are the key drawbacks:

• Lack of flexibility. Once the payment schedule is set, it generally cannot be changed. If your financial needs shift, due to a medical emergency, job loss, divorce, or other life event, you cannot simply call the insurance company and request more money.
• Cannot invest the full amount. Because the money is held by the insurance company, you cannot invest the entire settlement in higher-returning assets like stocks or real estate. The annuity’s return is fixed and typically modest.
• Inflation risk. Unless the settlement includes escalating payments, fixed payments lose purchasing power over time as prices rise. A $2,000 monthly payment today will buy significantly less in 20 years.
• Cannot access cash immediately. If you need a large sum of money for an emergency, a down payment, or a business opportunity, your structured settlement payments arrive on a fixed schedule and cannot be accelerated.

The inability to access cash when you need it most is the primary reason many structured settlement recipients explore selling some or all of their future payments. Fortunately, you do have options.

Can You Sell a Structured Settlement?

Yes. Every state has enacted a Structured Settlement Protection Act (SSPA), based on the National Structured Settlements Trade Association (NSSTA) model legislation, that allows structured settlement recipients to sell some or all of their future payments to a purchasing company in exchange for a lump sum of cash. The process requires court approval, a judge must determine that the sale is in your best interest before it can proceed.

You have several options when selling:

• Full sale: Sell your entire payment stream for a single lump sum.
• Partial sale: Sell a portion of each payment (e.g., $500 of your $1,500 monthly payment) while keeping the rest.
• Period sale: Sell payments from a specific time period (e.g., the next five years) and keep all payments after that.

To learn more about how selling works, visit our structured settlement purchasing page, use our structured settlement calculator to estimate your lump sum, or read our step-by-step guide on how to sell a structured settlement.

Structured Settlements for Minors

When the claimant in a personal injury case is a minor, structured settlements receive additional legal protections. Courts are especially protective of settlements involving children, and judges will closely scrutinize the proposed payment structure to ensure it serves the minor’s long-term interests.

In most cases involving minors, courts strongly favor, or outright require, structured settlements over lump sums. The structured format prevents parents or guardians from spending the child’s settlement money before the child reaches adulthood. Common structures include:

• Small periodic payments during childhood to cover medical or educational expenses
• A large lump sum payment at age 18 or 21
• Ongoing monthly payments that begin at age 18 and continue for life
• Deferred lump sums at milestone ages (25, 30, 35) to fund major life goals

If a minor who holds a structured settlement reaches adulthood and wants to sell their payments, the court approval process involves extra scrutiny. Judges want to ensure that the young adult fully understands the long-term consequences of trading future income for a lump sum. Having independent legal counsel is especially important in these cases.

Frequently Asked Questions

Are structured settlement payments taxable?

For personal physical injury or physical sickness settlements, generally yes, they are tax-free under IRC 104(a)(2) at both the federal and state level, including the investment growth on the annuity. Settlements for non-physical claims (such as emotional distress not related to a physical injury, or punitive damages) may be taxable. Consult a tax professional for your specific situation. For more details, see our article on structured settlement tax implications.

How long do structured settlement payments last?

The duration depends on the terms of the settlement agreement. Payments can last for a fixed period (such as 10, 20, or 30 years), for the claimant’s lifetime, or a combination of both. Some settlements also include scheduled lump sum payments at specific future dates. The payment schedule is customized during the original settlement negotiation and cannot be changed afterward.

What happens to a structured settlement when the recipient dies?

It depends on the type of payment. Guaranteed (period certain) payments continue to be paid to the recipient’s estate or designated beneficiary until the guaranteed period ends. Life contingent payments stop immediately upon the recipient’s death, and no further payments are made. Many structured settlements include both guaranteed and life contingent components. Learn more about life contingent payments.

Who pays for a structured settlement?

The defendant or the defendant’s liability insurance carrier funds the structured settlement. The insurer purchases an annuity from a life insurance company, and that annuity generates the periodic payments to the claimant. The claimant never pays anything to set up a structured settlement, it is entirely funded by the party that caused the injury.

Can I sell my structured settlement?

Yes. You can sell some or all of your future structured settlement payments to a purchasing company in exchange for a lump sum of cash. The transaction must be approved by a court under your state’s Structured Settlement Protection Act. You can sell the entire payment stream, a portion of each payment, or payments from a specific time period. Visit our structured settlements page to learn more or get a free quote.

What companies buy structured settlements?

Several companies purchase structured settlement payment streams, including Catalina Structured Funding (CSF), J.G. Wentworth, Peachtree Financial Solutions, Fairfield Funding, and others. Always compare offers from multiple buyers, as discount rates and lump sum amounts vary significantly between companies. See our structured settlement companies comparison for a detailed overview of the top buyers in the industry.

Get a Free Structured Settlement Quote

Whether you’re exploring your options or ready to sell, Catalina Structured Funding is here to help. We provide free, no-obligation quotes with no pressure. Our team handles all paperwork, legal filings, and court costs at no charge to you. Call (800) 317-3769 or request your free quote online today.