Structured settlements are a type of financial arrangement which provide regular payments to recipients for a long period of time. Individuals who receive payments are referred to as Annuitants and payments are referred to as annuities or annuity payments.
Structured settlements are often used to compensate lottery jackpot winners and individuals who were severely injured and require long term care or were disabled due to the injury and require financial compensation to cover living expenses. Annuity payments can also be established through life insurance trusts to provide inheritance money to heirs.
Structured settlements are guaranteed by an annuity owned by a life insurance company. When annuity payments are provided to compensate individuals injured through medical malpractice, automobile accident, or workplace injury, the funds are tax-free. When annuities are provided as lottery winnings, they may be subject to state and federal taxes.
Lottery winners often elect to enter into structured settlements because they receive a higher payout than accepting lump sum cash. For example, if lottery winnings are $1 million, the winner might only receive $400,000 as a lump sum payout because they must pay a higher tax rate. By breaking the payments down into smaller sums they can receive income for 20 years and pay less in taxes.
When structured settlements are arranged for injury compensation the damages must exceed $10,000 for adults and $5,000 for minor children. Depending on the extent of injury, type of ongoing medical care, or compensation for lost wages, Annuitants might receive payments for 5 to 20 years, or for their entire life.
Many factors are considered when establishing structured settlements. Annuity payments can be paid monthly, quarterly, semi-annually, or annually. Annuitants have considerable flexibility in establishing a structured settlement and will work with their lawyer to determine the best plan of action. However, once structured settlements are in place they cannot be changed without court authorization.
Annuities paid over a specific time period are referred to as 'designated period' or 'period certain annuities'. Annuitants receive a specific amount of money on a specific date for a specific number of years. If Annuitants die before the structured settlement is fully paid the remaining balance is paid to a designated beneficiary.
Annuities paid for life are referred to as 'life annuity structured settlements'. Oftentimes, life annuities are based on the Annuitant's life expectancy as opposed to their actual date of death. This is referred to as 'period certain'. If the Annuitant dies prior to their life expectancy, the remaining funds are distributed to designated beneficiaries. If the Annuitant lives beyond the expectancy, the annuity payments cease after the period certain expires.
Lump sum structured settlements provide Annuitants with one payment at a future date. This type of annuity plan is often used with minor children. Two types of lump sum annuities are offered and include 'lump sum' and 'life contingent lump sum'. The first allows Annuitants to transfer annuity payments to a beneficiary, while the second does not.
Life annuities provide structured settlement funding for life. Two types of life annuities are available including 'life only' and 'joint survivor'. The latter provides annuity payments to a designated beneficiary for the remainder of their life, while the first offers no provision for assigning beneficiaries.
A final option is known as a temporary life annuity structured settlement which provides Annuitants with regular payments for a set number of years. There is no provision for assigning annuities to a beneficiary and the structured settlement expires when the Annuitant dies.
Structured settlements can be complex and confusing. We invite you to learn more about the process and available options in our structured settlements article library. Here you will discover resources and valuable information to help make informed choices.