Structured Settlements: What Is A Structured Settlement And How Does It Work?

Written By: author image Bara Goldberg
author image Bara Goldberg
Bara Goldberg - Amanda Dobanton Esq. is a General Counsel for Fairfield Funding. She has been crucial to the growth of Fairfield Funding for the past 9 years. Prior to Fairfield, she interned at a law firm in Gwinnett County. Ms. Dobanton received a B.S. in History and Political Science from Brenau University and went on to obtain her Juris Doctorate Degree from Atlanta’s John Marshall Law School. Amanda is currently serving on the Board for the National Association of Settlement Purchasers. Amanda is a seasoned expert in the structured settlement and annuity field.

A structured settlement provides ongoing tax-free income to an injured claimant through scheduled payments over time. This provides financial stability compared to a lump sum payment that can be quickly spent. However, structured settlements lack flexibility to access immediate funds after the terms are set. That’s where the option of selling structured settlements comes in!
Here I’ve covered everything about structured settlements – how they work, benefits and downsides, when to consider selling your payments for a lump sum, and what to know before you cash out through a factoring company for immediate funds. 

Whether currently receiving periodic payments or debating future options after settling a lawsuit, use this as a resource to understand structured settlements so you can make the most informed decisions.

What Is a Structured Settlement?

A structured annuity settlement is a negotiated financial or insurance agreement providing long-term periodic payments to resolve a personal injury claim. Payments are made through an annuity funded by the defendant’s insurance company.

Structured settlements originated in Canada in the 1960s and became popular in the U.S. after Congress passed the Periodic Payment Settlement Act of 1982 in the 1980s making these payments tax-free. Today over $10 billion in structured settlements are issued annually in the U.S.

With a structured settlement, an injured claimant gives up the right to pursue a lawsuit in exchange for a series of payments over months or years. This provides financial stability compared to a single lump sum, which could be quickly spent.

The Benefits of Structured Settlements

There are many advantages of structured settlements, mainly relating to financial security.

  • Guaranteed Income for Life

A structured settlement payment continues for a fixed period or even for life, guaranteeing stable income. This ensures funds will be available to pay medical bills or daily living expenses.

  • Custom Payment Schedules

Structured settlements allow flexible payment schedules tailored to individual needs now and in the future. For example, funds can be set aside for a child’s college education.

  • Tax-Free Benefits

Unlike investing a lump-sum settlement, structured payments are income tax-exempt under federal Internal Revenue Code (Section 104(a)(2)). All interest earned also accrues tax-free.

  • Protection From Creditors

Structured settlement payments are generally exempt from seizure by creditors. This offers further financial safeguards.

  • Avoid Market Volatility

Structured settlement benefits remain unaffected by stock market fluctuations, economic downturns, or poor investment decisions.

  • Prevent Misusing Funds

Receiving settlement money over an extended timeframe often deters impulsive and inappropriate spending compared to getting a windfall all at once.

  • Can Promote Settlements

Defendants may offer a structured settlement periodic payment if they cannot afford a large lump-sum payout. This mutual arrangement helps avoid protracted litigation.

Common Uses of Structured Settlements

Structured settlements frequently resolve cases involving:

  • Personal Injury Case: Car accidents, slip-and-fall incidents, product liability
  • Medical Malpractice: Negligence by a healthcare professional
  • Workers’ Compensation: For employees injured on the job
  • Wrongful Death: Fatalities due to another party’s negligence

Structured settlements provide stable income over decades, making them well-suited for lifelong medical care or replacing lost wages.

How Does A Structured Settlement Work?

While your future periodic payments may seem complicated, there are just four parties in the typical process in the United State Of America:

The Claimant

The injured plaintiff who sued the defendant and agreed to structured settlement payments.

The Defendant

The at-fault party (or their insurer) responsible for funding the settlement through an annuity contract.

Assignment Company

A third-party company that assumes responsibility for annuity payments to the injury victim or claimant.

Annuity Issuer

A life insurance company that provides the annuity to fund the ongoing structured settlement payments.

Typical Structured Settlement Process

  • The claimant and defendant negotiate a settlement amount to resolve the lawsuit.
  • The defendant or their insurer purchases an annuity through an assignment company.
  • The assignment company names the claimant as payee of the annuity contract.
  • The annuity issuer provides fixed payments over months or years to the injured claimant.

So in practice, structured settlements take damages full circle back to the injured party under an ironclad payment arrangement.

Customizing Payment Options

The best benefit of structured settlements is customizing the payment schedule.

When Payments Start

Claimants, with the help of a structured settlement broker can decide to receive funds immediately or defer payments for years. Deferring allows interest to accrue tax-free.

Payment Frequency

Typical intervals are monthly, quarterly, semi-annually or annually. Faster payment cycles provide more frequent income.

Number of Payments

Settlements may specify a fixed number of payments or continue for life. Lifetime payments maximize financial security.

Increasing Payments

Payments can rise steadily to offset inflation or increase with milestones like birthdays. This helps maintain purchasing power.

Lump Sums

Arrangements often combine a partial lump-sum payout upfront followed by ongoing periodic payments. This meets immediate needs while retaining future income.

In short, almost any payment arrangement is possible with structured settlements. Your main work is understanding current and future financial responsibilities and goals.

What to Consider Before Accepting a Structured Settlement?

While structured settlements alleviate stresses of receiving a windfall payout, they limit financial flexibility. Important considerations include:

Immediate Financial Needs

If facing pressing expenses like medical bills, deferred payments may not help in the short term. Ask about an upfront lump-sum component.

Loss of Investment Opportunities

An investor may forfeit higher returns from a diversified investment portfolio than fixed annuity rates offer.

Changes in Financial Standing

If your means substantially improve thanks to an inheritance or new career, periodic payments could become unnecessary.

Time Value of Money

Receiving $100 today is preferable to $100 five years later since money presently available can earn interest or returns. Structured settlements pay more overall but delay funds.

Loss of Control and Ownership

You cannot access funds early, borrow against payments, or change terms. The annuity issuer maintains full authority.

Fees and Expenses

Administrative fees, insurance premiums and setup costs reduce payouts. Reputable structured settlement consultants fully disclose such expenses.

For these reasons, always consult an experienced legal or financial advisor before finalizing a structured settlement or selling off these payments.

Alternatives Of Structured Settlements

Depending on case circumstances and individual factors, alternatives like these also deserve consideration:

Lump-Sum Settlements

Opting for an immediate payout allows you to decide how to use funds through investments or paying off debts. However, better money management skills are essential.

Lifetime Annuities

Privately purchased standard annuity contracts offer guaranteed income without needing to win a lawsuit. Payouts continue for life or a set period.

Special Needs Trusts

If physically or mentally incapacitated with no close family, establishing a trust ensures settlement monies are professionally managed and solely used for your welfare.

Selling Your Structured Settlement Payments

Despite inherent safeguards structured settlements offer, life unpredictably changes. Unforeseen expenses arise. Financial mistakes happen. People grow dissatisfied with fixed payments. Should any such issues emerge, you do have options even after signing an ironclad settlement agreement. Structured settlement payment rights allow recipients to sell their future payments even after signing rigid settlement terms.

Factoring companies like Fairfield Funding buy future structured settlement payments in exchange for an immediate discounted lump-sum cash payout based on the present value of the remaining payments. This empowers recipients to use funds now based on their current needs despite relinquishing the full original settlement value. 

As an established industry leader, Fairfield Funding makes competitive offers based on your unique situation. 

We simplify the court-approval process for selling settlements while charging below-average fees. Our team smoothly guides clients through every requirement so you can receive funds promptly.

Common Reasons People Sell Their Structured Settlements!

  • Unexpected medical bills
  • Sudden loss of a job
  • Business or investment opportunities
  • Dissatisfaction with fixed payments
  • Relocation or family emergencies
  • Paying or consolidating debts
  • Funding college tuition
  • Making major purchases

These life events and circumstances cannot always wait for periodic settlement checks. By getting cash for structured settlements, you regain financial flexibility after signing rigid structured settlement terms.

Finding the Best Factoring Company to Work With!

If considering selling your future structured settlement cash, conduct thorough research beforehand. 

Not all settlement purchasers are equal. 

Look for these traits in reputable structured settlement buying companies:

  • Competitive buyout quotes and transparent fees
  • Court approval assistance and legal guidance
  • Timely and reliable payments
  • Professional, ethical conduct
  • No-obligation quotes

Avoid buyers pressuring you or charging 20%+ discount rates. Discount rates refer to the percentage that factoring companies use to reduce the total value of future settlement payments when calculating their upfront lump-sum payout amount. For example, a 15% discount rate means the buyer will offer 85% of what all remaining payments are worth over time.

Calculate discount rates into your decision along with what future settlement payments are worth over time. Then compare against immediate financial needs if you were to cash out through a factoring company. Knowing the impact of discount rates allows you to better weigh available options. Reputable companies charge reasonable discount rates between 5-15%.

Above all, read all contracts thoroughly and consult an attorney skilled in structured settlements before finalizing a sales agreement or signing any paperwork.

Don’t just take our word for it – Experience our outstanding service yourself!

Understanding the Court Approval Process

The Structured Settlement Protection Act is a federal law designed to protect individuals who choose to sell their settlements. This legislation requires court approval before any sale can take place, ensuring that sellers understand what they’re agreeing to and aren’t being taken advantage of by unscrupulous buyers.

As a result, judges scrutinize all structured settlement sales to ensure terms are reasonable and in the seller’s interests. Requirements typically involve:

  • Informing the court of your reasons for selling payments
  • Disclosing your medical condition and other personal information
  • Providing statements the sale adequately covers financial needs
  • Receiving explanations of your structured settlement’s benefits
  • Demonstrating understanding of the buyout terms and impact on your finances
  • Waiting 1-2 months for a hearing date once paperwork is filed

Reputable factoring companies shepherd clients through meeting every court prerequisite. Fairfield Funding stands ready to make this process smooth and efficient so you can receive your lump-sum payout faster.

Tax Consequences of Selling Structured Settlement Payments

In most cases, no federal tax applies provided the original personal injury settlement is tax-exempt. State laws follow the same principles. Consult a tax expert regarding your specific structured settlement and proposed sale.

Payouts from settlements not tied to physical injury may incur income tax on the transaction depending on state statutes. Punitive damages also often carry tax liabilities that factoring companies must report to the IRS.

Weighing the Pros and Cons of Selling Your Structured Settlement

Depending on your personal financial situation and reasons for needing money now, the benefits of selling structured settlements likely outweigh giving up future income you initially agreed upon. Still, consider drawbacks too:

Potential advantages of selling your structured settlement annuities include:

  • Quickly using money for pressing needs
  • Paying down high-interest debts
  • Investing the lump sum for greater returns
  • Funding college tuition
  • Making major purchases like a home

Downsides may involve:

  • Losing guaranteed income stability from ongoing payments
  • Having fewer funds should medical problems resurface
  • Outliving assets if not properly invested
  • Less protection from creditors
  • Owing taxes on certain types of settlements

Fairfield Funding helps educate consumers so they can carefully weigh options, avoid risks, and make informed decisions aligned with their objectives.

Alternatives to Selling A Structured Settlement

If hesitant to sell your future payments, investigate these options first:

  • Borrow money using structured settlement as collateral while retaining ownership
  • Apply for personal loans from banks, credit unions or online lenders
  • Lower expenses through lifestyle changes to make fixed payments cover more
  • Enter debt management programs to reduce interest rates and consolidate payments
  • Petition the court to adjust payment terms per changing hardships (difficult to achieve)

Consult experienced financial advisors too. They may identify alternatives like tapping savings, liquidating assets, claiming Social Security benefits early, or transferring payments to a charitable organization.

Answers to Common Structured Settlement Questions

Review responses below to frequently asked questions for further insights into structured settlements and your rights around these negotiated legal arrangements.

State guaranty funds protect policyholders up to $500,000 should a life insurer become insolvent. Structured settlements also commonly involve multiple backup insurers to guarantee continuity of payments if the primary underwriter fails.

Generally no, periodic payments remain exempt from federal/state income taxes and creditors provided the settlement involves physical injury or sickness. Consult a legal advisor regarding the specifics of your situation.

An independent third-party “assignment company” purchases the annuity to fund ongoing payments while naming the injured claimant as payee. Claimants typically cannot sell or borrow against the annuity itself given the assignment company retains ownership.

Unfortunately attempting to adjust or accelerate payments rarely succeeds absent extreme legal arguments like payment defaults or claimantdeaths. Petitioning the court still only results in changes occasionally due to binding contracts underlying structured settlements.

Always consult an attorney to review contractual fine print first. Understand exactly what discount rates apply and what losing future benefits means financially. Research reputable buyers with transparent processes, fair prices and positive reviews like Fairfield Funding.

Evaluate your ability to manage sizable sums responsibly, immediate financial demands, investment risk tolerance and need for long-term assured income. Recognize only one option provides ongoing stable payments while the other delivers total control immediately.

Missing payments constitutes breach of contract. First directly contact the company to rectify issues. If problems persist, consult your attorney about taking legal action and petitioning the courts to intervene. Missed payments qualify for state guaranty funds too.

Minors can technically receive structured settlements but never negotiate terms directly themselves. Parents, family members or legal guardians handle all legal elements until children reach 18. At that time, the beneficiary assumes full authority over the structured settlement arrangement.

Personal injury attorney fees, insurance premiums, transaction fees and setup costs subtract from the total annuity contract purchase price used to fund monthly payments. Reputable structured settlement consultants disclose all embedded costs impacting ultimate compensation totals.

Fairfield Funding is the one of best structured settlement companies, but some other options also include RSL Funding, DRB Capital, Sage Settlement Consulting, etc.

Want To Sell Your Structured Settlement?

Structured settlements provide invaluable future income assurances to injury victims needing lifelong care or income replacement. Customizable, tax-favored periodic payments ensure settlements stretch further over time too compared to individual investments.

Still, fixed schedules deny flexibility to access funds despite changing life circumstances. 

However, Factoring companies like Fairfield Funding address this cash flow challenge. We supply lump-sum payouts to consumers wanting to sell some or all future payments in exchange for immediate financial relief or pursuing new opportunities otherwise unavailable.

Fairfield Funding sets itself apart through low fees, easy processes and a dedication to customer interests when buying structured settlements. 

If considering selling your future payments from a legal settlement, contact us today for a fast, no-obligation quote. Our experts make it simple to turn payments you no longer want into cash sent quickly to empower your dreams.

author avatar
Bara Goldberg Finance Writer
Bara Goldberg - Amanda Dobanton Esq. is a General Counsel for Fairfield Funding. She has been crucial to the growth of Fairfield Funding for the past 9 years. Prior to Fairfield, she interned at a law firm in Gwinnett County. Ms. Dobanton received a B.S. in History and Political Science from Brenau University and went on to obtain her Juris Doctorate Degree from Atlanta’s John Marshall Law School. Amanda is currently serving on the Board for the National Association of Settlement Purchasers. Amanda is a seasoned expert in the structured settlement and annuity field.

Bara Goldberg

Amanda Dobanton Esq. is a General Counsel for Fairfield Funding. She has been crucial to the growth of Fairfield Funding for the past 9 years. Prior to Fairfield, she interned at a law firm in Gwinnett County. Ms. Dobanton received a B.S. in History and Political Science from Brenau University and went on to obtain her Juris Doctorate Degree from Atlanta’s John Marshall Law School. Amanda is currently serving on the Board for the National Association of Settlement Purchasers. Amanda is a seasoned expert in the structured settlement and annuity field.

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