What is a Structured Settlement?

Structured settlement annuities are a financial instrument that is normally used to provide regular, tax free payments to personal injury victims over a long period of time. Instead of facing unexpected stress and management issues that come with receiving a lump sum of money, the recipient is protected from bad judgment that could result in spending a large portion of the money that he or she needs to manage a lifetime of injury related expenses.

A structured settlement is a financial or insurance arrangement whereby a claimant agrees to resolve a personal injury tort claim by receiving periodic payments on an agreed schedule rather than as a lump sum. Structured settlements were first utilized in Canada after a settlement for children affected by Thalidomide.Structured settlements are widely used in product liability or injury cases (such as the birth defects from Thalidomide). A structured settlement can be implemented to reduce legal and other costs by avoiding trial. Structured settlement cases became more popular in the United States during the 1970s as an alternative to lump sum settlements. The increased popularity was due to several rulings by the IRS, an increase in personal injury awards, and higher interest rates. The IRS rulings changed policies such that if certain requirements were met then claimants could have federal income tax waived. Higher interest rates result in lower present values, hence annuity premiums, for deferred payments versus a lump sum.
Structured settlements have become part of the statutory tort law of several common law countries including Australia, Canada, England and the United States. Structured settlements may include income tax and spendthrift requirements as well as benefits and are considered to be an asset-backed security. Often the periodic payment will be created through the purchase of one or more annuities, which guarantee the future payments. Structured settlement payments are sometimes called periodic payments and when incorporated into a trial judgment is called a “periodic payment judgment."