After you file an accident or injury lawsuit, financial stress can start long before your case ends. Medical bills keep arriving, your income may have dropped, and everyday expenses do not stop.
As you explore your options, you may hear terms like “structured settlement” and “pre-settlement funding” and wonder which solution fits your situation. Understanding what a structured settlement is and how it’s different from pre-settlement funding can help you make informed decisions about your financial future.
Key Takeaways
- Structured settlements pay your compensation over time instead of in a single lump sum,[1] with payment schedules that can be customized to fit your financial needs.[2]
- The biggest benefits of structured settlements include predictable income and favorable tax treatment.[3] However, they also limit your access to cash and can be difficult to change once the payment schedule is finalized.[2]
- If you need money before your future payments arrive, you may be able to sell some or all of your structured settlement payments to a factoring company in exchange for a lump sum.[4]
- Pre-settlement funding is different from a structured settlement because it provides cash while your lawsuit is still pending, helping you cover expenses and avoid financial pressure before your case resolves.
What Is a Structured Settlement?
A structured settlement is a legal arrangement that pays compensation through a series of scheduled payments over time instead of a single lump sum payment. In most cases, the defendant or their insurance company funds the settlement by purchasing an annuity, which then makes payments to you according to a set schedule.[1]
You may also hear the term “structured settlement annuity.” While the terms are often used interchangeably, the annuity is the financial product that funds the settlement payments.[3]
One reason people choose a structured settlement is the favorable tax treatment. Under Internal Revenue Code Section 104, compensation for physical injuries or sickness is generally excluded from taxable income, and structured settlement payments related to those claims are usually tax free. However, some types of damages, such as punitive damages, may be taxable.[5]
How Do Structured Settlements Work?
A structured settlement involves several parties working together to create and fund your payment stream. The process typically follows these steps:[3]
- You and the defendant agree to settle the claim rather than continue litigation.
- The defendant or their insurance company transfers the payment obligation to a qualified assignment company.
- The assignment company purchases an annuity from a life insurance company. The defendant can also purchase the annuity without involving an assignment company; however, this opens up a risk of non-payment or default.
- You receive payments from the assignment company based on the terms outlined in the settlement agreement.
Structured settlements operate within a legal framework established by both federal and state law. The Periodic Payment Settlement Act of 1982 created tax rules that support the use of periodic payments in personal injury and wrongful death cases.[6] Several sections of the Internal Revenue Code govern the tax treatment of structured settlements and the transfer of settlement payment rights.[5]
Payment schedules can vary based on your needs, and could take the following forms:[2]
- Larger first payment: You receive a substantial lump sum upfront to cover major expenses, followed by smaller scheduled payments over time.
- Decreasing payments: You receive larger payments at the beginning of the settlement, with the payment amounts decreasing over time.
- Increasing payments: Your payments start smaller and gradually increase. The structure can also include regular smaller payments along with larger future payouts scheduled to cover anticipated costs such as medical treatment.
- Deferred payments: You postpone receiving payments until a future date specified in the settlement agreement, such as retirement age.
Benefits of Structured Settlements
A structured settlement can provide long-term financial support after you resolve a lawsuit. While every situation is different, benefits can include:
- Customized schedules: Settlement payments can be based on your expected needs, including monthly income or funds earmarked for education, medical care, or retirement.[2]
- Tax advantages: Payments from structured settlements that stem from physical injury or sickness claims are generally exempt from federal income taxes, allowing you to keep more of your compensation.[5]
- Steady income: Regular payments can help you cover ongoing expenses such as housing, medical care, and daily living costs. You won’t have to worry about managing a large lump sum or spending your settlement too quickly.[7]
Drawbacks of Structured Settlements
Structured settlements also come with limitations. Before agreeing to one, it is important to understand how the payment structure could affect your financial flexibility in the future.
- Limited access to cash: Once the settlement is finalized, you generally cannot access future payments early.[2]
- Reduced flexibility: Your payment schedule is established when the settlement is created, and changing it later can be difficult or impossible.[3]
- Inflation risk: Fixed payments may lose purchasing power over time as the cost of living rises, especially if the settlement doesn’t include payment increases.[7]
- Unexpected fees: Insurance companies may charge fees to manage the settlement fund, and in some states, they’re not required to disclose these fees.[3]
Common Uses
Structured settlements are most often used in cases that involve serious injuries, long-term medical needs, or the loss of a loved one. Common cases that may result in a structured settlement include:[7]
- Personal injury: People who suffer serious injuries in car accidents, slip and fall incidents, or other accidents may choose structured payments to help cover ongoing medical bills and lost income.
- Wrongful death: Families who lose a loved one may use structured settlements to replace lost household income.
- Medical malpractice: Structured settlements can help provide a reliable source of income to address the life-changing injuries that often result from medical malpractice.
- Workers’ compensation: Injured workers can use structured settlements to create a predictable stream of income that mirrors what they made before the injury.
What If I Have a Structured Settlement but Need Money ASAP?
A structured settlement can provide long-term financial security, but if you face unexpected and/or urgent expenses, waiting months or years for future payments may not be practical. In that situation, you may be able to sell the annuity to a factoring company in exchange for a lump sum of cash, however, court approval will be required.[4] Many people refer to these transactions as structured settlement loans, but they are actually sales of future payment rights rather than traditional loans that require monthly repayment.
One advantage of selling structured settlement payments is that you can access cash much faster than waiting for future payments to arrive, which may help if you are dealing with medical expenses, increasing debt, or another financial emergency. The main drawback is that factoring companies purchase payments at a discount, so the lump sum you receive will be less than the total amount of the future payments you give up.[4]
Structured Settlements vs. Pre-Settlement Funding
People often confuse structured settlements and pre-settlement funding because both legal terms involve future compensation. However, they serve different purposes.
A structured settlement is compensation you receive after resolving a lawsuit. Pre-settlement funding provides cash while your case is still pending, helping you cover expenses before your lawsuit settles or reaches a verdict.
| Feature | Structured Settlement | Pre-settlement Funding |
| What it is | A settlement paid through scheduled future payments | A cash advance against the expected value of a pending lawsuit |
| Timing | Begins after a case settles or reaches a judgment | Available before your case resolves |
| Payment structure | Regular payments over months, years, or a lifetime | One lump sum advance |
| Repayment | No repayment required | Nonrecourse, meaning repayment comes from your settlement or verdict if you win |
| Access to funds | Limited to the payment schedule established in the settlement agreement | Provides faster access to money during litigation |
| Regulated by | Federal and state tax and insurance laws | State laws, which can vary |
| Best suited for | People who want long-term financial stability after a case ends | People who need financial support while waiting for a case to resolve |
Get Financial Support During Your Case
Structured settlements can provide dependable income over time. They can work well for people who want long-term financial stability after a lawsuit, but they don’t solve every financial challenge. If you are still pursuing your case and your expenses can’t wait, pre-settlement funding may help.
Unlike a structured settlement, pre-settlement funding can provide cash while your case remains active, helping you pay for rent, mortgage payments, utilities, medical bills, groceries, and other everyday expenses.
Here’s how litigation funding works: funding approval is based largely on the strength of your case rather than your credit score or employment history. That means many plaintiffs can qualify even when traditional financing is not an option.
USClaims has helped thousands of plaintiffs access funding while they pursue personal injury claims. If you need financial support while your lawsuit moves forward, apply online or call 1-877-USCLAIMS today to learn more about your options. For qualified applicants, funding may be available in as little as 24 hours.”
Structured Settlements FAQs
What is a structured settlement annuity?
A structured settlement annuity is the financial product that funds a structured settlement. After a lawsuit settles, the defendant or insurance company typically purchases an annuity from a life insurance company, which then makes scheduled payments to the plaintiff over time.[1] People often use the terms “structured settlement” and “structured settlement annuity” interchangeably, but the annuity itself is the investment vehicle that generates the payments.[3]
How do structured settlements work?
Structured settlements work by converting a lawsuit settlement into a series of future payments rather than a single lump sum. After you settle your case, the defendant usually transfers the payment obligation to an assignment company, which purchases an annuity from a life insurance company. The insurer then sends payments according to the agreed schedule, which may include monthly, annual, fixed term, or lifetime payments.[3]
Can I get structured settlement early?
You typically can’t change the terms of your structured settlement to access the funds early.[2] However, you may be able to sell some or all of your future structured settlement payments to a factoring company, which will then provide you with a lump sum payment. Many people refer to this process as getting a structured settlement loan, although it is more of a sale rather than a loan. Most states require court approval before a transfer can take place, and the lump sum you receive will generally be less than the total value of the future payments being sold.[4]
Sources
[1] National Structured Settlements Trade Association, “What Are Structured Settlements?,” https://nssta.com/structured-settlements
[2] Forbes Advisor, “What Is A Structured Settlement?,” https://www.forbes.com/advisor/legal/personal-injury/what-is-a-structured-settlement/
[3] Annuity.org, “What Is a Structured Settlement?,” https://www.annuity.org/structured-settlements/
[4] Annuity.org, “Selling Annuity Payments,” https://www.annuity.org/selling-payments/
[5] Internal Revenue Service, “Tax implications of settlements and judgments,” https://www.irs.gov/government-entities/tax-implications-of-settlements-and-judgments
[6] Congress.gov, “Periodic Payment Settlement Act of 1981,” https://www.congress.gov/bill/97th-congress/senate-bill/1934
[7] Society of Actuaries Research Institute, “Structured Settlement Annuities,” https://www.soa.org/globalassets/assets/files/resources/research-report/2022/structured-settlements.pdf
Disclaimer: Throughout this website, the term “loan” may be used for convenience to describe pre-settlement funding. However, such transactions are not loans in the legal sense. Repayment is strictly contingent upon the successful resolution of your case. If your case is unsuccessful, no repayment is required. Common terms like “lawsuit loan” are used colloquially but misrepresent the non-recourse nature of pre-settlement funding.
