- Written By Rachel Christian
Writer & Researcher
Rachel Christian is a Certified Educator in Personal Finance with FinCert, a division of the Institute for Financial Literacy. She is committed to promoting financial literacy and making complex financial topics accessible to readers from all walks of life.Read More
- Reviewed By Roger Wohlner
- Updated: May 8, 2023
The Structured Settlement Process
The process of issuing a structured settlement is a complicated one that results in a simpler, easier solution for someone who wins a case.
If in a court proceeding a plaintiff is determined to be owed money, a structured settlement can be considered instead of a lump sum. Both sides work with a trained consultant to determine the amount of money and the needs of the plaintiff. The consultant then uses the money to purchase an annuity from a life insurance company.
The annuity is managed by a life insurance company separate from the at-fault party. The money is thus protected from market fluctuations, recessions and all the other risks typically associated with investments. The plaintiff, the person harmed, simply receives a scheduled series of payments for a set amount of time.
It’s a solution that many people take advantage of: Nearly $6 billion in new structured settlements are issued each year, according to the National Structured Settlements Trade Association.
How Structured Settlement Issuing Companies Work
Structured settlements are used by courts in many different types of cases to replace or supplement income that was lost through the fault of someone else. Since they’re conducted by a third party, it also means someone doesn’t consistently need to associate with the person or entity that wronged them.
Structured Settlement Issuers*:
- New York Life
- Berkshire Hathaway
- Liberty Mutual
* StructuredSettlements.com has no relationship to any of the above-listed issuers and is not engaged in the issuance of new structured settlement policies.
The structured settlement issuing companies function in a manner that shields owners as well. Structured settlements don’t affect an individual’s ability to qualify for other forms of aid. Meaning, if someone is set to receive a settlement, the money they receive from it does not affect their ability to qualify for Medicaid, Social Security and other disability benefits.
The income from structured settlements is also shielded from taxes. This flexibility is why so many litigators recommend structured settlements to their clients rather than a lump-sum payout after winning a case.
Types of cases that can result in a structured settlement:
- Severe Personal Injury: Research shows that the more serious the injury is, the more likely a structured settlement will be awarded instead of a lump sum.
- Workers Compensation Cases: If you’re hurt on the job, a court can award you a structured settlement to pay for the damages.
- Wrongful Death: When a court decides someone is at fault, the surviving family members of a victim can be awarded a structured settlement.
Your Right to Sell Structured Settlement Payments
If you have a structured settlement you have a right to sell your payments. Facing a crisis like foreclosure or not having transportation to get to a job, many structured settlement owners choose to sell some or all of their payments. When a structured settlement is set up, it’s typically tailored to meet the needs of the injured or surviving person. Unfortunately, sometimes those needs change and the structured settlement owner needs access to his or her money right away. Selling future payments allows someone to get access to the money they need quickly.
Federal and state laws exist to protect consumers against unscrupulous companies. People who need quick access to the funds tied up in a structured settlement turn to purchasing companies to buyout their future payments in exchange for a lump sum. Unfortunately, there are companies out there waiting to prey on people who are in a desperate situation.
When working with a structured settlement buyer, make sure you have all of the end-of-deal fees in writing and no attorney or compliance fees are passed onto you. Bottom line: if your quote says you should get $65,000 for selling your payments that is the amount that should be listed on the check.
“Will I have to talk to a judge to sell my structured settlement?”
Yes, in order to cash out your structured settlement you will need to present your case before a judge. However, a structured settlement buyer should be able to help you along the way with whatever paperwork you will need and how to file it properly. Don’t be nervous. This regulation was put in place to protect you, the consumer, to ensure it is in your best interest. In the end, the majority of transfers go through.
Structured Settlement Laws and Regulations
Structured settlements are regulated on a national, state and sometimes even local level.
Congress passed the Periodic Payment Settlement Act in 1982, which streamlined the use of structured settlements in personal injury lawsuits. The legislation shielded structured settlement payments from federal, state and local income taxes. Congresses thinking was that by setting up payments over time, individuals would be protected from spending a lump sum too quickly and thus jeopardizing their financial future.
Federal law, as well as additional regulations in 48 states, requires judicial approval to transfer structured settlement payments. The judge evaluates each case to ensure they meet a “best interest” standard. The judge will ask you a series of questions to make sure you understand the consequences of selling your payments and will be financially secure once the transfer is complete.
New Hampshire, Wisconsin and the District of Colombia don’t have Structures Settlement Protection Acts, but owners can still sell payments in the state where the insurance company is located. Some municipalities even have stricter regulations and are typically in areas where there is a larger at-risk population with structured settlements.
Structured Settlements and Minors
Adults aren’t the only ones awarded structured settlements. Cases are often settled which award a significant amount of money to a minor in the form of a series of payments to cover the living expenses of a child.
Such cases are often won because the plaintiff is able to demonstrate that the child’s life will be irrevocably changed for the worse. It might be that because of an incident caring for the child will cost significantly more money. In the case of a wrongful death case, a child is awarded money that a parent or close family member would have been able to provide had their life not been cut short.
Cases that Result in Structured Settlements for Minors:
- Personal Injury
- Structured settlements were actually first issued after children were born with severe birth defects because of exposure to the drug Thalidomide in the womb.
- Birth Injury
- Many birth injuries are inevitable. However, some birth injuries happen because of doctor negligence.
- Medical Malpractice
- Birth isn’t the only time a minor can be the victim of medical malpractice.
- Wrongful Death
- When a party is deemed at fault in the death of a parent, a wrongful death case can emerge which results in a structured settlement.
Managing a large sum of money meant to last decades can be difficult for a young person or parent. So structured settlements became used more to ensure the money was retained and used for the child’s care as prescribed by the court. Having a scheduled series of payments makes it easier to ensure a child has their basic needs met, like shelter, clothing, food and medical care.
Selling a Structured Settlement Issued to a Minor
The sale of structured settlement payments for minors is significantly more regulated on a state and federal level. Among other regulations like needing substantial documentation to prove a serious financial need, judges typically appoint a Guardian Ad Litem to evaluate the payment sale and to verify that it is in the best interest of the seller.