A structured settlement is a way of paying a legal claim through a series of fixed, scheduled payments funded by an annuity, rather than through a single lump sum. It is most common in personal injury, wrongful death, workers’ compensation, and medical malpractice cases. A life insurance company issues the annuity and sends payments directly to you on the schedule agreed to at settlement. For qualifying personal physical injury claims, those payments are received free of federal income tax. The terms are locked in from the start, which is both the appeal and the catch.
How the Payments Actually Reach You
When both sides agree on a settlement, the defendant or their liability insurer does not keep writing you checks for the next 20 years. Federal tax law lets them transfer the payment obligation to a separate company through what is called a “qualified assignment.” That assignee buys an annuity from a life insurance company, and the insurer pays you directly on the schedule written into the agreement.1Office of the Law Revision Counsel. 26 USC 130 – Certain Personal Injury Liability Assignments
You never own or manage the annuity yourself. The defendant walks away from any future obligation. The insurer handles the administration and sends the money. For the arrangement to qualify for its tax treatment, the annuity must come from a licensed insurance company, and the payment amounts and timing must be fixed from the beginning. The payments cannot be sped up, delayed, increased, or decreased by you.1Office of the Law Revision Counsel. 26 USC 130 – Certain Personal Injury Liability Assignments That rigidity is the trade for the tax benefits.
The Tax Treatment and Where It Stops
Payments you receive on account of personal physical injuries or physical sickness are excluded from federal gross income, whether they arrive as a lump sum or as periodic payments. The full payment amount goes into your pocket with no federal income tax owed. Wrongful death damages tied to a physical injury or sickness qualify for the same exclusion. Workers’ compensation payments received through a structured settlement are also tax-free under a separate provision of the same statute.2Office of the Law Revision Counsel. 26 USC 104 – Compensation for Injuries or Sickness When the annuity grows internally between payments, that growth stays inside the tax-free stream too. Investing a lump sum on your own would not get the same treatment.
The exclusion has real edges. Punitive damages are generally taxable even when awarded alongside a personal injury claim.3Internal Revenue Service. Tax Implications of Settlements and Judgments Emotional distress damages fall outside the exclusion unless they stem directly from a physical injury; if your settlement compensates emotional distress alone, only the portion reimbursing actual medical treatment avoids tax.2Office of the Law Revision Counsel. 26 USC 104 – Compensation for Injuries or Sickness Discrimination claims produce fully taxable damages even when the recipient suffers genuine emotional harm.
Designing the Payment Schedule
The payment schedule is negotiated during settlement and can be shaped to your situation. Common design choices include:
- Payment frequency, usually monthly, quarterly, or annual.
- Annual inflation increases built into the amount, often 2% or 3%.
- Milestone lump sums at specific points, such as when a child turns 18 or when college expenses begin.
- Duration, which can be a set number of years, your lifetime, or a combination.
Inflation protection deserves particular attention. A payment that covers your expenses today can fall well short in 15 or 20 years. The adjustment has to be part of the original agreement. You cannot add inflation protection after the annuity is purchased, and that is one of the design decisions people most often regret skipping.
What Happens if You Die
What happens to remaining payments after your death depends entirely on the option chosen at the start:
- Life-only payments stop at your death. Your beneficiaries receive nothing from the settlement, regardless of how many payments remained in the projection.
- Period-certain payments continue for the full guaranteed period whether you are alive or not. Choose a 20-year period and die after year 8, and your beneficiary receives the remaining 12 years.
- Life with period certain pays for your life, but if you die before the guaranteed minimum period ends, your beneficiary collects for the rest of that period.
A young person with dependents who selects life-only payments and dies unexpectedly leaves family members with nothing from the settlement. The decision is permanent and cannot be revisited after funding.
Why Structured Settlements Get Used
Structured settlements show up most often in cases involving long-term or permanent disability, wrongful death cases where surviving family members need ongoing support, and medical malpractice settlements with future care costs. They are also well established in workers’ compensation claims when future medical expenses or wage replacement needs to stretch across many years.
The common thread is an injured person with ongoing financial needs that a lump sum could easily be spent down before covering. Regular surgeries, long-term rehabilitation, and decades of lost income are the situations where periodic payments earn their keep. Large lump-sum recipients frequently exhaust the money within a few years. A guaranteed income stream you cannot outlive, if you chose a lifetime option, does different work than a checking account balance.
The trade-off is inflexibility. An unexpected expense, whether a medical emergency or a home repair, cannot be covered by tapping future payments early. If inflation runs higher than expected, fixed payments lose purchasing power unless you negotiated annual increases at the outset.
Selling Future Payments Later
Even though the annuity terms cannot be modified, federal law does allow you to sell some or all of your future payment rights to a third-party buyer. Any company that buys those rights without advance court approval faces a 40% excise tax on the discount it earns, which effectively forces every sale through a courtroom. The judge must find that the transfer does not violate federal or state law and is in your best interest, taking into account the welfare and support of your dependents.4Office of the Law Revision Counsel. 26 USC 5891 – Structured Settlement Factoring Transactions
The financial cost of selling is steep. Factoring companies apply a discount rate to your future payments to calculate what they will hand you in cash today. You will receive significantly less than the face value of the payments you are giving up. Judges scrutinize these transfers closely, and many are denied when the court concludes the sale would leave the recipient worse off.
Effect on SSI and Medicaid
If you receive Supplemental Security Income or Medicaid, a structured settlement needs careful planning. SSI’s countable resource limit remains $2,000 for an individual in 2026,5Social Security Administration. 2026 Cost-of-Living Adjustment (COLA) Fact Sheet and settlement payments can count as both income when received and as a countable resource when saved. Even modest periodic payments can push you over that threshold and trigger a loss of benefits.
Two strategies help preserve eligibility. Payments directed into a properly established special needs trust generally are not counted as your assets for SSI and Medicaid, though at your death the trust must reimburse the state for Medicaid benefits paid on your behalf. Court-ordered structured settlement payments deposited directly into an ABLE account may not count as income for SSI purposes; up to $100,000 in an ABLE account is excluded from the resource limit, with an annual contribution cap of $20,000 in 2026. ABLE accounts are available to individuals whose qualifying disability began before age 26.
Both strategies must be built into the settlement design from the start, with the trust or ABLE account named as payee. Retrofitting these arrangements after the annuity is purchased generally is not possible.
Settlements Involving Minors
When a minor receives a personal injury settlement, the court reviews the fairness of the amount and often requires or strongly favors structured payments. The reasoning is that structured payments prevent parents or guardians from spending the child’s money on unrelated expenses. Until the child turns 18, or longer depending on the terms, the money can be used only for the child’s specific needs as outlined by the court. Many of these settlements are designed so that larger payments begin when the child reaches adulthood.
What Happens if the Insurer Fails
Because the payments depend on a life insurance company’s ability to pay for potentially decades, the financial strength of the issuing company matters. Annuities for structured settlements are typically issued by highly rated insurers that invest primarily in investment-grade assets like U.S. Treasury bonds and high-quality corporate bonds.
If the issuing company becomes insolvent, every state has a life and health insurance guaranty association that steps in to cover policyholders. Coverage levels vary by state, but most states guarantee annuity benefits up to $250,000, with some states providing higher limits for structured settlement annuities specifically. If your settlement’s present value exceeds your state’s coverage limit, you carry some insolvency risk, which is why checking the issuer’s financial strength ratings before the annuity is purchased is worth the time.