Is a Structured Settlement Right For You?
Learn what a structured settlement is: how payments are scheduled, the tax treatment and what to weigh first.
If you're expecting a settlement from a lawsuit, one of the most important financial decisions you'll face is how to receive your funds. There are several options to consider, including taking the entire amount at once or receiving payments over time through a structured settlement.
While some people prefer receiving their entire settlement upfront, there is value in the stability and predictability of a customized payment schedule.
Understanding the benefits of a structured settlement can help you make a more informed decision about your settlement proceeds.
What is a Structured Settlement?
A structured settlement is an agreement between the opposing parties under which the individual, or claimant, receives the settlement in the form of a stream of periodic payments.
Instead of receiving all settlement funds at once, payments are scheduled according to terms established within the settlement agreement. The payment schedule can be customized to address both current and long-term financial needs, often including a combination of an upfront payment and structured distributions over time.
Depending on the circumstances, a plan may include:
- Monthly income payments
- Annual payments
- Future lump-sum distributions for major expenses
- Payments that increase over time
- Lifetime income options
A structured settlement must be agreed upon as part of negotiations and included in the settlement agreement before the case is finalized. Once finalized, the settlement terms cannot be changed to reflect a structured settlement later. The settlement agreement outlines a schedule of future payments designed to support your financial goals. To provide those payments, the settlement obligation is transferred to an assignment company, which secures an annuity or funding agreement that delivers payments to you according to the agreed-upon schedule.
Why Would Someone Choose a Structured Settlement?
Many people receiving a settlement are balancing immediate concerns with long-term financial needs. Medical care, rehabilitation, household expenses, education costs, retirement planning and family responsibilities can all play a role. A structured settlement can help by providing:
Guaranteed Payments You Can Count On
A MetLife structured settlement can be tailored to meet a claimant’s specific needs. Payments can be scheduled for almost any length of time, including over a claimant’s lifetime in some cases. Payments can be made in equal amounts or can vary over time and can begin immediately or be deferred. Payments can also be designed with escalators, and benefit increases to address future inflation concerns and may be scheduled to include future lump sum payouts for things such as necessary medical care or equipment, a down payment on a house, or educational needs.
Potential Tax Advantages
For qualifying cases, including many personal injury, wrongful death and certain workers’ compensation settlements, structured settlement payments may be excluded from federal, state and local income taxes. Section 104(a)(2) of the Internal Revenue Code clarifies that the full amount of the structured settlement payments is tax-free. By contrast, the investment earnings on a lump sum payment are usually fully taxable.
For non-physical injury cases, such as employment litigation, payments are taxable but spreading them over time may reduce the overall burden compared with a lump sum.
Protection From Market Volatility
A structured settlement provides guaranteed settlement payments that are not tied to stock market performance but rather have a guaranteed rate of return. This can help reduce financial uncertainty and provide stability during periods of market volatility.
No Ongoing Investment Management
When taking a settlement as one large lump sum, managing that money could require ongoing financial decisions, investment monitoring and professional guidance, which incurs ongoing fees.
A structured settlement does not require active account management, frequent decisions or ongoing management/service fees. Many claimants appreciate the simplicity of having a payment schedule in place.
How Flexible are Structured Settlement Payments?
One of the most valuable benefits of a structured settlement is flexibility. Payment schedules can be designed around current financial needs, wants, and future goals.
Examples
Example 1: Monthly Income Support for Everyday Living Expenses
A payment schedule might include:
- Monthly payments for your mortgage, rent, car payment, groceries, utilities, cell phone, subscription services, and more
- Funds for ongoing medical care, such as doctor visits, physical therapy, upgraded medical equipment, home health aide, and more
- Scheduled increases over time to help with rising cost of living
This approach can help create a predictable household budget.
Example 2: Planning for Major Life Events
This payment schedule could provide:
- A payment for the purchase of a new home
- A larger payment when a child reaches college age
- Additional future lump sums for other major life events
Example 3: Delaying Payments Until Expenses Increase
In some situations, current expenses may be relatively modest while larger obligations are expected later. Payments can sometimes be structured to begin or increase when:
- Retirement begins
- Planned medical treatment or long-term care starts
- Estate planning
- Other anticipated future expenses
Why Does Financial Strength Matter?
A structured settlement is designed to provide dependable income over many years. Settlement recipients can take comfort in knowing their payment stream is backed by an established provider with decades of experience in structured settlements and a commitment to meeting long-term obligations.
Working with trusted professionals can help ensure your customized plan aligns with your goals and future needs.
Common Questions About Structured Settlements
A structured settlement can be designed to address both immediate and future needs.
Structured settlements can be used in a wide range of settlement amounts and case types.
Scheduled payments can make it easier to manage ongoing expenses and plan more effectively.
Structured settlements are commonly used in personal injury, wrongful death, workers’ compensation and certain non-physical injury cases, like employment litigation.
Making the Decision That's Right for You
Choosing how to receive your settlement is a personal decision. The right choice depends on your financial goals, family needs, future expenses and experience with managing a large amount of money.
Factors to consider include:
- Current financial needs
- Anticipated future expenses
- Family responsibilities
- Retirement planning goals
- Desire for guaranteed, predictable income
Want to learn more about structured settlements and your payout options?
Visit our Claimant Center, explore our Frequently Asked Questions and speak with your attorney, structured settlement broker and tax advisor to better understand whether a structured settlement may be right for your situation.