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Tuesday, December 10, 2013

What is structured settlement?

Let's say you are injured in a car accident and you make a personal injury claim against the other driver. Eventually the other driver and his insurer get back to you with an offer of $10,000 to cover your medical expenses. The other driver wants to pay the amount in five installments, one payment per month. You agree to the schedule, and both parties avoid going to court. This type of financial arrangement is known as a structured settlement.

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It is unknown when or where the structured settlement concept originated. However, the first recorded ones were in Canada in the 1960s. At the time, some pregnant women were taking a drug named Thalidomide to alleviate the symptoms of morning sickness. However, the drug, which was introduced in West Germany in 1957, had one very harmful side effect: It deformed the fetus. The lawsuits that followed called for a payment schedule to cater to the needs of the children affected by Thalidomide. This type of financial product covered a period of 70 to 80 years, the estimated lifespan of the children.


Structured settlements caught on in the United States in the 1970s, when the number of personal injury claims was increasing. Rising interest rates led to lower present values (future amount of money discounted to reflect current value), thus making lump sum payments less attractive. Also, the IRS began a series of rulings, one of which allowed claimants to waive federal income tax depending on certain requirements.


A claimant usually presents a settlement agreement that requests that the defendant or insurer make a series of payments over a certain period of time in exchange for dismissing a lawsuit. The insurer has two choices to fund the structured settlement. One of the choices is to purchase an annuity from a life insurance company. This arrangement is known as a "buy and hold" case, or "unassigned" case. The other choice is the "assigned case:" delegating periodic payment duties to a third party, which purchases a qualified funding asset—as defined by Section 130 of the Internal Revenue Code of 1986 (26 U.S.C. 130)—for funding the settlement.

Assigned and unassigned

If the defendant or insurer goes with an unassigned case, the periodic payment obligation is offset by the purchase of the annuity from the life insurance company. The defendant or the insurer can name the claimant as the payee under the annuity, which results in the life insurance company sending the payment directly to the claimant. Also, the claimant can be named the annuitant under the annuity if the obligation of making payments is contingent on the claimant continuing to be alive. In an assigned case, the payment obligation is sent to an assignment company, which would require the defendant or insurer to make payments sufficient for buying an annuity. Usually, the assignment company is an affiliate of the life insurance company.


A structured settlement is a more convenient alternative to a lump sum settlement. It is particularly advantageous to people who cannot afford to make one-time payments; instead, the settlement is stretched out over a certain period of time, depending on what the defendant can accommodate. Also, structured settlements are handled before a claim goes to trial, which means that all parties reduce (or eliminate) legal and related costs.


  1. Great way to describe about structured settlement... Finally there is someone who can explained it easily...

  2. A structured settlement is a more convenient alternative to a lump sum settlement. It is particularly advantageous to people who cannot afford to make one-time payments;