Terry Turner, Financial writer for Annuity.org
  • Written By
    Terry Turner

    Terry Turner

    Senior Financial Writer and Financial Wellness Facilitator

    Terry Turner is a senior financial writer for Annuity.org. He holds a financial wellness facilitator certificate from the Foundation for Financial Wellness and the National Wellness Institute, and he is an active member of the Association for Financial Counseling & Planning Education (AFCPE®).

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  • Edited By
    Savannah Pittle
    Savannah Pittle, senior financial editor for Annuity.org

    Savannah Pittle

    Senior Financial Editor

    Savannah Pittle is an accomplished writer, editor and content marketer. She joined Annuity.org as a financial editor in 2021 and uses her passion for educating readers on complex topics to guide visitors toward the path of financial literacy.

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  • Financially Reviewed By
    Timothy Li, MBA
    Timothy Li, MBA Headshot

    Timothy Li, MBA

    Business Finance Manager

    Timothy Li, MBA, has dedicated his career to increasing profitability for his clients, including Fortune 500 companies. Timothy currently serves as a business finance manager where he researches ways to increase profitability within the supply chain, logistics and sales departments.

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  • Updated: August 3, 2023
  • 8 min read time
  • This page features 9 Cited Research Articles
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How to Cite Annuity.org's Article

APA Turner, T. (2023, August 3). Structured Settlement Payout Options: Understanding Your Choices. Annuity.org. Retrieved June 15, 2024, from https://dev.annuity.org/structured-settlements/payout-options/

MLA Turner, Terry. "Structured Settlement Payout Options: Understanding Your Choices." Annuity.org, 3 Aug 2023, https://dev.annuity.org/structured-settlements/payout-options/.

Chicago Turner, Terry. "Structured Settlement Payout Options: Understanding Your Choices." Annuity.org. Last modified August 3, 2023. https://dev.annuity.org/structured-settlements/payout-options/.

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Key Takeaways

  • Structured settlements are paid based on an agreement between the injured party and the defendant in a lawsuit.
  • To fund the settlement, the defendant buys an annuity from a life insurance company.
  • The injured party can choose from various structured settlement payout options to suit their unique situation or circumstances.
  • Once funded, you cannot alter structured settlements, and they may yield lower returns compared to other investments.

How Are Structured Settlements Paid Out

Most commonly, defendants pay out structured settlements after both parties in a civil lawsuit agree to the settlement’s terms as a means of resolving the suit. The structured settlement amount is typically based on a dollar amount of damage caused by the injury.

Instead of choosing to take their damages as a single lump-sum payout, the claimant opts for a series of periodic payments that may continue for the rest of their life — or the lifetime of their dependents or other beneficiaries spelled out in the structured settlement agreement.

These payments can cover the ongoing costs of medical bills, long-term care or other needs, and may even provide guaranteed lifetime income for the injured party. 

The General Process of Structured Settlement Payouts

  1. An injury — either intentional or through negligence — occurs.
  2. The victim files a lawsuit and pursues the claim against the defendant in court.
  3. The two parties reach a settlement, agreeing to a cash amount and payout.
  4. The injured party releases the defendant from any further liability as part of the settlement.
  5. The defendant purchases an annuity from a life insurance company to fund the settlement.
  6. The life insurance company makes periodic payments to the defendant.

The Flexibility of Structured Settlements

Structured settlements offer nearly unlimited flexibility to meet the needs of injury victims. This means the payout options are nearly unlimited — shaped by the needs of the injured party over time.

Lawyers and insurance companies can craft structured settlements to address specific situations and needs of the person receiving the settlement. This includes protecting their settlement from creditors and generating guaranteed lifetime income.

On the other hand, structured settlements cannot be altered or changed once they are funded. Selling them involves high discount rates and they have a lower return rate than other investment instruments such as stocks.

>> Read More: How Structured Settlements Work

The Role of Annuities in Structured Settlements

Annuities play a leading role in structured settlement payouts. An annuity provides the actual payments, ensuring a steady stream of income for the recipient. Holding the funds in an annuity helps protect the settlement funds, provides long-term financial security and can be tailored to meet specific needs and future obligations.

Start and End Dates

Your payments can begin immediately, or you may delay your payments to allow for a longer accumulation period. The longer the accumulation period, the greater the value of your settlement will be when you begin taking distributions.

Pro Tip

The duration of your payments depends on the terms of your contract, including whether it is a life-only or period certain annuity.

A life-only annuity will continue to pay out for the rest of your life, whereas a period certain annuity will pay you only for the length of time specified in the contract.

In addition to the contract start and end dates, you can negotiate:

  • Payment frequency
  • Distribution amounts
  • Death benefits

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Different Types of Structured Settlement Payouts

Because structured settlement payouts are designed to meet the specific needs of the injured party, there are several different types of structured settlement payouts.

Examples of Common Structured Settlement Payout Types

  • Temporary life annuity
  • Joint and survivor annuity
  • Deferred lump-sum 
  • Percentage increase annuity
  • Step annuities

Temporary Life Annuity

A structured settlement may be paid with a temporary life annuity, also called a life with period certain annuity. This guarantees payments for the life of the recipient or for a specific period of time, whichever is longer.

It guarantees payments for as long as the recipient is alive, but it will not continue paying their beneficiaries upon the recipient’s death.

Joint and Survivor Annuity

Joint and survivor annuities issue payments for as long as the recipient is alive. After their death, the payments continue for the life of the recipient’s beneficiaries.

Payments may be slightly lower, but they tend to last longer.

Percentage Increase and Step Annuities

These are two types of structured settlement approaches aimed at managing inflation and interest rate changes. 

Step annuities stabilize structured settlement income by incorporating gradual increases in the payment amounts over a fixed period of time or the recipient’s lifetime.

Percentage increase annuities gradually increase payments by a fixed percentage rather than a fixed amount over time.  

Deferred Lump Sum Settlements

Deferred lump sum structured settlements see large payments scheduled at major milestones in the recipient’s life. These might include payments scheduled to pay toward a child’s college education when they turn 18 or those made when the recipient reaches retirement age. Deferring these lump sums can also serve as insurance against inflation.

While some deferred lump sum settlements can be set up for life, most are structured for a specific period of time.

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Types of Cases That Use Structured Settlements

Structured settlements can be used in any lawsuit where someone is awarded damages. They are frequently used in cases involving personal injury, workers’ compensation, medical malpractice and wrongful death.

Personal Injury Cases

Personal injury claims require you to show that someone else was responsible for your injury or illness. Their action could have been deliberate, as a result of their negligence or after they were at fault for an accident.

Structured settlements can provide long-term financial security if your injury requires future medical or long-term care or if it disrupts future earnings.

Workers’ Compensation Cases

Employers may agree to a structured settlement in workers’ compensation cases to avoid long-term financial costs for injuries a worker suffers on the job, especially if the injury may require expensive, long-term care and treatment.

These types of injuries may include:

  • Amputations
  • Brain and spinal cord injuries
  • Injuries resulting in partial or total disability
  • Multiple traumas
  • Occupational-related lung diseases
  • Severe burns
  • Vision or hearing loss

Medical Malpractice Cases

According to the American Board of Professional Liability Attorneys, medical malpractice is when a hospital, doctor or other health care worker causes injury to a patient through a negligent act or omission. 

A patient’s age may factor into whether a settlement is paid through an immediate lump sum, a structured settlement or a combination of both. Doctors typically have to sign off on a medical malpractice settlement even if their employer, such as a hospital, wants to settle.

Wrongful Death Cases

A wrongful death claim is typically brought by dependents or other family members against individuals or organizations that deliberately or negligently caused the death of another person, according to the Legal Information Institute at Cornell Law School.

Wrongful death structured settlements typically cover:

  • Loss of income at the time of death 
  • Loss of potential future earnings
  • Loss of benefits, such as health insurance and pension
  • Medical expenses associated with the death
  • Funeral and burial expenses
  • Loss of spousal companionship
  • Loss of parental guidance
  • Pain and suffering of the deceased before death

Source: Legal Information Institute

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Factors To Consider When Choosing Payout Options

There are several factors that you and your attorney should consider before deciding what kind of payout option best suits your structured settlement. These include how tax law, your ability to manage money and your behavior toward money all come into play.

Tax Implications

According to the Internal Revenue Code, any compensatory damages in a wrongful death settlement involving a structured settlement are effectively tax-free and not included as part of your gross income.

Proceeds from selling a structured settlement — if you choose to do so in the future — are also tax-free.

Financial Needs and Money Management Skills

Your financial needs due to your injury will help your lawyer decide how to negotiate your structured settlement.

In many cases, structured settlement payments may be an injured person’s main — or only — source of income. 

Good financial management skills are essential to handle the funds responsibly and maintain long-term financial stability. You may want to consult a financial advisor to make sure you properly manage your structured settlement payments.

Life Expectancy and Health Conditions

It’s important to take your life expectancy and overall health condition into account when negotiating a court settlement.

Your lawyer may want to negotiate for larger periodic payments over a specific period of time. Or you may want to make sure payments continue to your spouse or other beneficiaries after your death.

Structured Settlement Payout FAQs

How is money distributed when resolving a claim with a structured settlement?

Depending on the terms of your contract, your payments may be distributed on a monthly, yearly or quarterly schedule. Payouts may be in fixed amounts or may increase or decrease, according to your needs.

How much will I pay in taxes on my settlement money?

Section 104(a)(2) of the federal Internal Revenue Code excludes damages paid for physical injuries or wrongful death. Punitive damages, however, are not excluded. Therefore, the IRS collects taxes on structured settlement money that was negotiated as part of punitive damages or distress that was not caused by a physical illness or injury. Always consult an attorney or tax professional before making financial decisions with potential tax consequences.

Can you change a payout option after choosing one?

Structured settlement annuities offer highly flexible payout options. But it is crucial to decide on the payout option and schedule at the time of settlement. Once established, the payout schedule is set in stone, and you cannot modify or change payout options.

Please seek the advice of a qualified professional before making financial decisions.
Last Modified: August 3, 2023

9 Cited Research Articles

Annuity.org writers adhere to strict sourcing guidelines and use only credible sources of information, including authoritative financial publications, academic organizations, peer-reviewed journals, highly regarded nonprofit organizations, government reports, court records and interviews with qualified experts. You can read more about our commitment to accuracy, fairness and transparency in our editorial guidelines.

  1. Wood, R. W. (2023, April 10). How Lawsuit Structured Settlements Work and Are Taxed. Retrieved from https://www.forbes.com/sites/robertwood/2023/04/10/how-lawsuit-structured-settlements-work-and-are-taxed/?sh=436420753049
  2. National Structured Settlements Trade Association. (2023). Federal Tax Policy. Retrieved from https://nssta.com/public-policy/federal-tax-policy
  3. American Board of Professional Liability Attorneys. (2022). What Is Malpractice? Retrieved from https://www.abpla.org/what-is-malpractice
  4. Legal Information Institute at Cornell Law School. (2022). Wrongful Death. Retrieved from https://www.law.cornell.edu/wex/wrongful_death
  5. U.S. Internal Revenue Service. (2020). Tax Implications of Settlements and Judgments. Retrieved from https://www.irs.gov/government-entities/tax-implications-of-settlements-and-judgments
  6. Legal Information Institute at Cornell Law School. (2015). 26 U.S. Code § 104. Compensation for Injuries or Sickness. Retrieved from https://www.law.cornell.edu/uscode/text/26/104
  7. Federal Register. (2012, January 23). Damages Received on Account of Personal Physical Injuries or Physical Sickness. Retrieved from https://www.federalregister.gov/documents/2012/01/23/2012-1255/damages-received-on-account-of-personal-physical-injuries-or-physical-sickness‌
  8. National Structured Settlements Trade Association. (n.d.). Structured Settlements and Qualified Assignments: How Federal Tax Rules Benefit All Parties in a Claim. Retrieved from https://nssta.com/sites/default/files/library/2016/2016-10/StructuredSettlementsAndQualifiedAssignments.pdf
  9. U.S. Department of Justice. (n.d.). Structured Settlement Brokers. Retrieved from https://www.justice.gov/civil/structured-settlement-brokers