A structured settlement pays out over time instead of as a single lump sum. Typical structures combine monthly income payments with scheduled future lump sums — for example, $2,000 per month for life, plus $50,000 every 5 years. The exact schedule is designed by a settlement planner to match the injured person's needs, and it's funded with a tax-free annuity.
How Payment Schedules Are Designed
Settlement planners design schedules around the plaintiff's needs. The most common building blocks:
- Monthly income payments — to replace lost wages or cover living expenses
- Future lump sums — scheduled for known future costs (college tuition, mortgage payoff, medical needs)
- Guaranteed vs. life payments — payments for a set number of years, or for life
- Inflation protection — payments that increase by a fixed percentage each year
The annuity is purchased from a life insurance company rated for financial strength, and the payments are tax-free under IRC §104(a)(2) when the settlement is for personal physical injury or wrongful death.
Example 1: Monthly Income for Life
A 35-year-old plaintiff settles a personal injury case for $500,000. Instead of taking the cash, they structure it:
| Payment | Amount | Timing |
|---|---|---|
| Monthly income | $2,500/month | For life, guaranteed 20 years |
| Future lump sum | $50,000 | At year 10 |
| Future lump sum | $100,000 | At year 20 |
The monthly payments replace lost income. The lump sums cover expected future needs — for example, a child's college costs or a home renovation for accessibility.
Example 2: Structured for a Child
A minor child's wrongful death settlement is structured to provide support through adulthood:
| Payment | Amount | Timing |
|---|---|---|
| Monthly income | $1,500/month | Ages 18–25 |
| College lump sum | $40,000 | At age 18 |
| Graduate school lump sum | $60,000 | At age 22 |
| Home purchase lump sum | $100,000 | At age 30 |
This structure protects the funds from being spent before the child is old enough to manage them, while providing income during the transition to adulthood.
Example 3: Medical Needs Structure
A plaintiff with ongoing medical needs structures part of the settlement to fund care:
| Payment | Amount | Timing |
|---|---|---|
| Monthly care income | $4,000/month | For life, 3% annual increase |
| Equipment lump sum | $25,000 | Every 5 years |
The 3% annual increase helps the payments keep pace with rising care costs. The periodic equipment lump sums fund replacement of medical equipment.
Example 4: What a Buyout Looks Like
Using Example 1: the plaintiff decides to sell the $50,000 lump sum due at year 10. Here's how a buyout changes the picture:
| Item | Before buyout | After buyout |
|---|---|---|
| Lump sum at year 10 | $50,000 | Sold — gone |
| Cash received now | $0 | ~$30,000 (at ~12% discount) |
| Monthly income | $2,500/month for life | $2,500/month for life (unchanged) |
The plaintiff trades a guaranteed $50,000 in 10 years for roughly $30,000 today. That's the real cost of a buyout — and why comparing discount rates matters. Run your own numbers with our Structured Settlement Calculator.
Key Takeaways
- Structured settlements are designed around your needs — income, future costs, and protection
- Payments are tax-free when the settlement is for personal physical injury or wrongful death
- Annuities are funded through highly rated life insurance companies
- If you sell payments, you give up guaranteed future income for a discounted lump sum
- Always compare multiple verified buyers before selling
Learn the basics in our What Is a Structured Settlement guide →
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