If you win a civil lawsuit or settlement and the judge awards you monetary compensation, you can typically decide how you want to receive your funds. These payments either come in a lump sum or in installments over time. If you opt for the latter, you might receive a structured settlement annuity — a series of tax-free disbursements that provide financial security and cover your legal expenses.

A structured annuity removes the complexity of managing a lump sum. However, it’s essential to understand how this type of annuity works before deciding between the two. 

What’s a structured settlement annuity?

A structured settlement annuity is an investment that provides regular, tax-free payments to a plaintiff in a civil lawsuit. Cases usually include medical malpractice, workers’ compensation, wrongful death, and personal injury. Generally, the defendant purchases an annuity through a life insurance company to guarantee the payments to the claimant. 

Plaintiffs can negotiate how they receive a structured settlement payout. Here are a few of the most common choices. 

Lifetime payments

This settlement agreement option guarantees payments for life. It’s ideal for claimants who can’t work or face long-term medical expenses.

Fixed-term payments 

Structured settlement annuities often pay out for a fixed period, such as 10 or 20 years. Payments stop at the end of the term, even if the claimant is still alive. 

Lump sums combined with periodic payments

Sometimes, plaintiffs need money upfront to cover immediate expenses like legal fees. In this situation, you might negotiate a lump sum, then structure settlement payments for a fixed term or life. 

No matter which option you choose, the Periodic Payment Settlement Act of 1982 specifies that personal injury damages can be excluded from gross income, meaning the payments are tax-free, whether taken as a lump sum or series of distributions. 

Traditional annuity vs. structured settlement annuity 

A traditional annuity is a financial product that addresses long-term saving or investment vehicles; you make an investment with a life insurance company in exchange for a consistent income stream later in life. 

A defendant who loses a civil lawsuit can purchase a structured settlement annuity to compensate the claimant. It’s part of a legal settlement — the defendant isn’t buying an annuity as an investment, rather, they’re funding it on the plaintiff’s behalf.

How does a structured settlement annuity work?

A structured settlement annuity results from a legal agreement mediated by a court of law. It works by providing an alternative to a lump sum, allowing the plaintiff to address their needs without worrying about investing money or dealing with tax issues. The defendant works with an insurance company to purchase the annuity and distribute payments to the claimant under the structured settlement terms.

When working with an attorney, claimants in a personal injury lawsuit can tailor their structured annuity payout to meet their needs. The options can go beyond lifetime income, fixed period payments, or a lump sum combined with periodic payments. They can also include:

• Scaled-up payments: If you expect your injury-related expenses to increase over time, you can negotiate smaller initial payments followed by larger distributions. 

• Scaled-down payments: Alternatively, if you need more money to cover expenses early on, you can opt for payments that decrease later in life.

• Additional payments: Often used in structured settlements for minors, this option provides additional payments to fund anticipated expenses like college tuition. 
• Deferred payments: If you don’t have immediate needs, you can defer payments to a later date, such as retirement.

Benefits of a structured settlement annuity

A structured settlement annuity can aid recovery after a personal injury or similar lawsuit. Structured settlements provide regular income, attractive tax treatment, and a foundation for long-term financial planning. 

Here are a couple of the most valuable benefits of having a structured settlement annuity.

Tax advantages

Unlike traditional investments that trigger taxable events now or in retirement, settlement payments from a qualifying court case don’t incur federal or state taxes. In general, the money you’ll receive from the defendant will have been taxed once already, whether it comes from their investments or their income.

Long-term financial security and care

In addition to tax-free status, structured settlement annuities provide a guaranteed income stream. Regular payments can replace your other income if you can’t work, pay medical expenses, and contribute to your retirement fund. They also enhance financial security because you don’t have to decide how to invest a lump sum or worry about market performance. 

Structured settlement vs. lump sum annuities

When you win a legal settlement, you typically have two payout options: a structured settlement annuity or a lump sum. Your decision will depend on your overall financial picture, comfort and discipline with investing, and near and long-term goals. 

Pros of structured settlement annuities

• Consistent guaranteed income: With a structured settlement annuity, you know exactly how much money you’ll get and when you’ll get it. 
• Customization: You can work with an attorney, the court, and the defendant to design a payment schedule that suits your needs now and in the future. 
• No risk of financial mismanagement: Structured settlement annuities remove the guesswork and risk associated with investing and managing a lump sum of cash. 

Cons of structured settlement annuities

• Lack of flexibility: Once you reach an agreement with the defendant, your annuity payments schedule is difficult to adjust. 
• Limited access to cash: If you have an emergency or your circumstances change, you can’t access your funds immediately. 
• Potentially lower returns: Theoretically, you could earn more money if you make the right investment decisions with a lump sum. Inflation can erode the purchasing power of your annuity payments over time, a factor you have more control over when investing a high principal. 

Pros of a lump sum

• Immediate access to cash: You have access to a lump sum payment right away, which can help you handle medical bills or other debt immediately. 
• Investment options: When you receive your settlement funds up front, you can decide how to invest your money. If you make the right choices, you can earn more interest and investment income, leading to higher returns over time. 

Cons of a lump sum

• No guaranteed income: When a lump sum payment is gone, it’s gone. You can’t count on the security associated with structured settlement payouts. 
• Investment-related risk: Every investment carries risk, especially ones chasing quick returns in volatile markets.
• Financial mismanagement: If you’re not careful with your money, you risk losing some or all of it via poor investments and spending it too quickly or impulsively. Maybe save the new Mercedes for retirement.

Are structured settlement annuities guaranteed?

Somewhat. Structured settlement annuities are considered secure because they’re backed by financial strength and claims paying ability of the issuing life insurance company. However, this guarantee is only as good as the insurance company that issues the annuity. For instance, Gainbridge is a smart choice since we’re a proud subsidiary of Group 1001, which promotes investment security and has billions of dollars of combined assets under management. Be sure to check the financial strength ratings of insurance companies before agreeing to a structured settlement.

Explore your annuity options with Gainbridge 

Gainbridge offers annuity products tailored to various financial needs and retirement goals. From guaranteed income streams, including lifetime options with custom payout schedules, to fixed and variable annuities, Gainbridge has a solution for every situation. 

With no hidden fees or commissions, Gainbridge’s annuities put more of your money back in your hands. 

FAQ

How long do structured settlement annuity payments last?

It depends on how you customize your settlement agreement. Some structured settlement annuities deliver payouts for life, ideal for claimants who can’t work, have lots of medical expenses, or want a secure source of regular retirement funds. You can also agree to a term, such as 10 or 20 years, or take a lump sum payment immediately in addition to fixed, regular payments. 

Can I change my structured settlement terms?

Before signing a settlement agreement, you can set up your structured settlement payout terms. Once the case is settled and an agreement is in place, it’s unlikely that the insurance company that issued the annuity contract will change the terms. 

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This article is intended for informational purposes only. It is not intended to provide, and should not be interpreted as, individualized investment, legal, or tax advice. The GainbridgeⓇ digital platform provides informational and educational resources intended only for self-directed purposes.

Guarantees are subject to the financial strength and claims paying ability of the issuing insurance company. Annuities are issued by Gainbridge Life Insurance Company, located in Zionsville, Indiana. Annuities are long-term investment vehicles and contain terms for keeping them in force.