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March 27, 2025

What Is a Structured Settlement Annuity​?

Stewart Willis
PRESIDENT & HIGH NET WORTH ADVISOR
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A structured settlement annuity provides an ongoing stream of payments over time instead of a lump sum. You might've heard about them in relation to personal injury or lawsuit settlements.

This type of legal arrangement comes with limitations, but it could bring added financial stability and potential tax benefits. Let's look closely at how structured settlement annuities work and how they help you make informed decisions.

Structured Settlements vs Annuities

When you first hear “ongoing payments over a period,” you might think is the same as a standard annuity. This isn't the case. Considering a structured settlement vs an annuity? Understanding the differences can help you determine the best option.

What Does Structured Settlement Annuity Mean?

​A structured settlement annuity is a financial arrangement where someone receives regular payments over time. Typically, it’s the result of a legal settlement. They party not at-fault doesn’t get a lump-sum payment.

Instead, the at-fault party funds the settlement by purchasing an annuity from an insurance company. The annuity guarantees the recipient (not at-fault party) a steady income stream. You’ll mostly find this in personal injury or wrongful death cases.

What Does an Annuity Mean?

An annuity is a financial product that provides regular payments over time. Insurance companies sell this type of product to people for retirement income or as a source of stable income. Unlike structured settlements, you can buy annuities voluntarily. They don’t always involve legal settlements.

4 Key Differences between a Structured Settlement vs Annuities

When comparing a structured settlement vs an annuity, consider these key differences:

  1. Structured settlement annuities are legal settlement payout. People use standard annuities as an investment or retirement income.
  2. The defendant and insurer sets up a structured settlement annuity. Anyone can buy a regular annuity.
  3. Structured settlements typically have a fixed schedule that isn't adjustable. An annuity you buy from an insurance company depends on the terms in the contract.
  4. The party not at-fault typically receives a tax-free structured settlement annuity. However, a standard annuity may be taxable depending on type.

Payout Options of a Structured Settlement Annuity

A structured settlement annuity offers different payout options, allowing recipients to receive funds to suit their financial needs. Once set, you can't change these options.

Fixed Period Payments: Payments continue for a set number of years, regardless of whether the recipient is alive.

  • Lifetime Payments: Payments last for the recipient’s entire life.
  • Series of Large Payments: Some structured settlements include larger payments at specific intervals.
  • Increasing Payments: Payments start smaller and grow over time to help with inflation or rising expenses.

Payout options for a structured settlement annuity can be:

  • weekly
  • bi-weekly
  • monthly
  • quarterly
  • semi-annually
  • annually

Payouts depends on the annuity issuer and the terms of the settlement.

Injured person speaking to advisor about a structured settlement annuity

Are There Tax-Free Structured Settlement Annuities?

Yes, you most commonly see tax-free structured settlement annuities. The Internal Revenue Code (IRC) Section 104(a)(2) exempts some settlement payments from taxes. Recipients don’t have to pay federal or state income taxes on their scheduled payments. This covers:

  • Payments from physical injury or wrongful death cases
  • Medical expenses and costs related to care
  • Compensation for a permanent disability

However, there are exceptions. Taxes may apply:

  • If part of the settlement includes punitive damages, those amounts are taxable.
  • If you reinvest payments and earn interest, the extra income is taxable.
  • If the settlement comes from a non-injury case like contract disputes or employment lawsuits.

Who Owns the Annuity in a Structured Settlement?

In a structured settlement annuity, the recipient receives payments, but they do not own the annuity itself. Instead, an insurance company holds and manages the annuity. This makes sure payments follow the agreed-upon schedule.

Here's how ownership works:

  • The defendant or their insurance company purchases the annuity from an insurance provider.
  • The insurance company owns and controls structured settlement, making payments to the recipient.
  • The recipient has the right to receive payments but can't change the annuity terms once set.

Can the Recipient Change the Structured Settlement?

No, the recipient cannot change the annuity terms. Once established, the payment schedule remains fixed. Yet, recipients may sell their future payments for a lump sum, but this requires court approval.

How to Sell a Structured Settlement Annuity

Thinking about cashing out of a structured settlement? Well, you can sell a structured settlement annuity. However, there are legal steps and financial factors to consider. Some people choose to sell their payments when they need a lump sum for major expenses:

  • medical emergencies
  • debt repayment
  • home renovations or repairs
  • large purchases

Here’s an overview of how to sell a structured settlement annuity:

  1. You must have a settlement purchasing company evaluate your structured settlement annuity. You can choose to between a full or partial buyout of your structured settlement. Buyers usually pay less than the total value of your annuity.
  2. You need to get court approval to sell your structured settlement, so you are getting the best offer.
  3. After the evaluation and court approval, you can get a lump sum payment.
  4. If you sell the entire settlement, you won’t receive any future payouts. If you sell a part of your structured settlement, you may receive reduced payments.

Selling a structured settlement annuity can provide immediate cash but weigh the long-term impact before deciding. You can work with a financial advisor to help you make a decision that align with your goals.

Pros and Cons of a Structured Settlement Annuity

Now that you understand how structured settlements work, you can evaluate their pros and cons. These are some advantages:

  • Provides a steady, reliable income
  • Offers tax-free payments in most cases
  • Protects against reckless spending
  • Hs different payout options
  • Reduces the risk of running out of money too soon

These are some disadvantages:

  • Payments are fixed and can’t be changed
  • Limited access to large sums of cash
  • Inflation may reduce purchasing power over time
  • Selling payments requires court approval and comes at a discount
  • Investment opportunities are limited compared to a lump sum

Get the Big Picture for Your Finances

Whatever you choose to decide with your structured settlement, make sure you have the right information to decide. Our financial advisors evaluate your unique situation to holistically analyze how to tackle your goals.

Get a free portfolio review today!

Stewart Willis is the founder and president of Asset Preservation Wealth & Tax, a financial planning firm in Phoenix, Arizona. Investment advisory services offered through Foundations Investment Advisors, LLC, an SEC registered investment adviser.

The commentary on this blog reflects the personal opinions, viewpoints and analyses of the author, Stewart Willis, providing such comments, and should not be regarded as a description of advisory services provided by Foundations Investment Advisors, LLC (“Foundations”), an SEC registered investment adviser or performance returns of any Foundations client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment, legal or tax advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Personal investment advice can only be rendered after the engagement of Foundations for services, execution of required documentation, including receipt of required disclosures. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Foundations manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Any statistical data or information obtained from or prepared by third party sources that Foundations deems reliable but in no way does Foundations guarantee the accuracy or completeness. Investments in securities involve the risk of loss. Any past performance is no guarantee of future results. Advisory services are only offered to clients or prospective clients where Foundations and its advisors are properly licensed or exempted. For more information, please go to https://adviserinfo.sec.gov and search by our firm name or by our CRD # 175083.

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