A structured settlement is an arrangement in which payments are made over time after a judgment in a lawsuit or an insurance claim. Some settlements include a portion of the payout up-front, with the remaining balance "structured" into monthly, bi-annual or annual payments.
Structured settlements were created in the mid-1970s after the Internal Revenue Code allowed defendants to purchase annuities in order to fund financial obligation. The annuities paid out over a period of time, paying the defendant's judgment. These structured payment plans were devised for "large catastrophic injury cases," according to RinglerAssociates.com, but now they are just as likely to be used for small-scale cases, with some even under $50,000.
Winning a lawsuit or filing an insurance claim for a large sum of money does not mean that you will receive the payment in full at one time. Some companies and individuals prefer to set up a payment structure to meet current and future financial obligations. If you sue and then win a lawsuit, the defendant's insurance company purchases annuities from another insurance company, who in turn makes the payments to you.
Most structured settlements include up-front payments for medical expenses, legal fees, and other costs related to the injury. The settlements can continue for a person's lifetime and even pay a portion to the person's estate at the time of death.
There are companies whose primary business is to purchase structured settlements. They offer to buy your settlement for a lump sum, allowing you to purchase a home or make some other large expenditure. These companies are in business to make a profit and you will be the one to lose money on the deal, not them. If you find yourself in this situation, carefully consider your options before signing over your payments. Make sure to contact several companies to make sure you receive the most money possible.
Structured settlement payments are tax free on both the federal and state level, whereas a lump sum payout can incur taxes on any investment proceeds or interest earned from it. Attorney's fees are often less when a structured settlement is offered and accepted. The benefits of having a steady income over a long period of time can be less worrisome to someone than a large lump sum that needs to be managed or invested.