What Is A Structured Settlement
Preferred Settlements, Inc.

What Is A Structured Settlement

Historically, money paid because of a personal injury lawsuit has been paid in the form of a lump sum at the time of settlement. This kind of payment, especially in very large catastrophic injury cases, places the claimant (or the family) in the position of managing a large sum of money often spent quickly, leaving little or nothing to cover future needs of a seriously injured person. In order to create a more stable financial base for the claimant, structured settlements were developed.

These arrangements may be voluntary, as in a pre-trial settlement, or they may be required by law or a court order, as in a settlement involving a minor. The defendant may agree to make future payments and purchase an annuity contract from a life insurance company to fund the payments. Annuity contracts have been a preferred method of funding these obligations because of their pricing and flexibility for settlement design. An alternative, however, is a trust fund which invests only in the United States treasury obligations. These trusts add the safety of investment in obligations issued by the U.S. Government.

By definition, a Structured Settlement is the payment of money for a personal injury claim where at least part of the settlement calls for future payments. The payments may be scheduled for any length of time, even as long as the claimant's lifetime, and may consist of installment payments and/or future lump sums. Payments can be in fixed amounts or the can vary. The schedule is structured to meet the financial needs of the claimant.

There are some important benefits to the claimant in structuring the settlement:

  1. The claimant receives money when it is needed. Instead of receiving a lump sum which has to be invested at a risk and managed for a fee, the money is paid out over time, which is better correlated with the actual need for funds.
  2. The claimant does not have to pay income tax on the payments received, which includes an internal buildup of funds over time. A lump sum received also would be tax-tree, but most later income from investing that money would be taxable.

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