When Are Structured Settlements Used In Personal Injury Cases?

Structured settlements are periodic-payment arrangements that convert part or all of a personal injury settlement into a stream of tax-advantaged payments paid over time. They are used when claimants, frequently those with catastrophic or long-term care needs, prefer a predictable, professionally underwritten flow of funds rather than a single lump-sum payment. In this blog, we explain when structured settlements are typically used, the legal and tax framework that supports them, the advantages and tradeoffs compared with lump sums, practical examples of common payment patterns, and tips for injured people making this important financial decision.

“Structured settlements can transform an uncertain future into predictable, reliable care for people with serious injuries. The right settlement design, tailored to medical needs, family structure, and long-term costs, protects clients from rushed spending decisions and preserves resources for decades.” — John J. Malm, Naperville injury attorney

What is a Structured Settlement and When Did They Become Common?

A structured settlement is an agreement, typically reached as part of settling a tort claim, under which a plaintiff accepts periodic payments funded by an annuity purchased from a highly rated life insurer. The tax code and federal statutes encouraged their use beginning in the early 1980s: the Periodic Payment Settlement Act and related federal provisions permit the tax-free treatment of damages for physical injury when paid as periodic payments and provide for “qualified assignments” that transfer a defendant’s periodic-payment liability to a third party (usually an assignment company) who funds the annuity. These rules reduce the defendant’s administrative burden and allow plaintiffs to receive tax-free, reliable payments.

Structured settlements became especially prominent after Congress and the IRS adopted rules that created a clear, tax-favored pathway for periodic payments in physical injury and wrongful death claims, a policy choice intended to protect injured people from the financial hazards of large lump-sum awards and to assure defendants of predictable resolution.

How Often are Structured Settlements Used?

Industry statistics show that structured settlements remain a major part of the market for settling personal-injury claims, particularly where injuries are severe and future care needs are substantial. The National Structured Settlement Trade Association (NSSTA) reported record industry placement in recent years: the structured-settlement industry placed over $8.6 billion of premium in 2023, and industry commentary indicates continued growth into 2024–2025. Survey research and insurer studies (for example, a 2025 study widely quoted in the trade) find that among surveyed claimants the distribution of payout choices at settlement often splits among lump sum, full annuity, and blended approaches, with a meaningful minority electing annuities or partial annuities.

Put plainly: structured settlements are not just an occasional option, they are a routine resolution tool in many complex personal injury and wrongful death cases, and their use has grown in dollar terms in the last several years.

Typical Situations When a Structured Settlement is a Good Fit

Structured settlements are commonly used in these situations:

• Catastrophic injury cases (spinal cord injury, traumatic brain injury, severe burns) where the injured person faces ongoing medical care, attendant care, and long-term living needs.
• Wrongful death cases where future support for minor children or surviving dependents is required.
• Cases involving minors where the plaintiff is a child and payment management over many years reduces the risk of premature dissipation of funds.
• When the claimant wants budget certainty and tax advantages, as structured payments are typically tax-free where they constitute damages for physical injury and are therefore insulated from income tax on the recurring payments.

In practice, many settlements use a blended approach: some immediate cash for current needs (medical bills, home modifications) and structured periodic payments for long-term care and income replacement. A MetLife industry study found that claimants’ payout choices commonly include lump sum, annuity, and blended options, with many recipients reporting satisfaction with annuity-style arrangements for budgeting and security.

Key Advantages of Structured Settlements

• Predictable income stream that matches future medical and living expenses; useful where ongoing care is certain.
• Tax treatment: periodic payments that are damages for physical injury are generally tax-free to the recipient, preserving purchasing power compared with taxed investment earnings.
• Protection against poor spending decisions: structured payments reduce the risk that a single large payout will be quickly spent, which many empirical studies associate with poor long-term outcomes for injury claimants.
• Customization: payments can be timed to cover specific needs (immediate medical care, monthly living costs, future lump sums for college tuition or equipment).
• Creditor protection in many circumstances: depending on state law and the claim structure, payments may be less accessible to creditors or divorced spouses than a lump sum.
• Backed by high-rated insurers: the annuity that funds the structured settlement is typically issued by a major life insurer, providing professional management and regulatory oversight.

Tradeoffs and Disadvantages

• Less liquidity up front: If the injured person needs a large immediate cash outlay beyond the portion settled as lump sum, a structured settlement can leave them cash-short unless a blended settlement is negotiated.
• Limited flexibility: Once the payment schedule is set and annuities purchased, payments cannot normally be accelerated, increased, or redirected except through secondary marketplaces (which often involve deep discounts and legal approval).
• Potential inflation risk: Unless inflation-indexed or with cost-of-living adjustments, fixed nominal payments lose purchasing power over decades. However, structured settlements can include COLA-style increases at the time of purchase.
• Complexity and need for expertise: Drafting a life-care plan, matching payment frequency to projected costs, and selecting annuity counterparties requires actuarial and medical input and specialized counsel.
• Opportunity cost: For some claimants with prudent investment capacity and immediate needs, a lump sum invested wisely could outperform the nominal value of structured payments, but the tax treatment, spending behavior, and investment risk must be considered.

Practical Examples of Payment Patterns

• Lifetime income for a catastrophically injured adult: monthly payments for life to cover attendant care and housing.
• Combination plan for a parent of minor children: initial lump sum for immediate expenses plus monthly payments timed to child ages for college expenses and support.
• Staged payments for future surgeries and home adaptations: a schedule that front-loads the first few years for surgery and rehabilitation then shifts to steady monthly income for ongoing care.

Designing the pattern begins with a life-care plan and financial projection so payments align with documented needs.

Frequently Asked Questions about Structured Settlements

Q: Are structured-settlement payments taxable?
A: Generally no, periodic payments that represent damages for physical injury or sickness are treated as tax-free under federal law. However, other components (punitive damages, interest) may be taxable, and tax consequences can vary with how a settlement is drafted. Consult tax counsel.

Q: Can I sell my future structured payments for cash now?
A: Yes, there is a secondary market where claimants can sell future payments to a factoring company. Courts in most states must approve such transactions to protect claimants. These transactions typically involve substantial discounting; they should be a last resort and require careful legal and financial advice.

Q: How much of a typical personal-injury settlement is structured?
A: It varies by case. Industry surveys and studies suggest that a meaningful share of settlements involving catastrophic injury use structured or blended payouts; recent industry data shows billions in annual premium placed for structured settlements, reflecting substantial usage in high-value cases. Exact percentages depend on case mix and claimant preference.

Q: Who decides the annuity provider and options?
A: Typically, the defendant or its insurer purchases the annuity, but the plaintiff’s counsel negotiates the payment pattern, protections, and any indexing. Use counsel and financial advisors experienced in structured settlements to review the annuity issuer and contract terms.

Q: Should I always take a structured settlement?
A: Not always. Structured settlements make sense when there are foreseeable long-term needs, when the claimant values budgeting certainty and tax efficiency, or when protective creditor arrangements are desirable. For plaintiffs with urgent lump-sum needs or strong investment plans, a lump sum (or a blended structure) may be appropriate. Evaluate on a case-by-case basis with legal and financial advisers.

Contact the Experienced Illinois Personal Injury Attorneys at John J. Malm & Associates

Structured settlements require legal, medical, and financial coordination. At John J. Malm & Associates, our attorneys work with life-care planners, actuaries, and financial experts to design settlement structures that align with each client’s unique medical prognosis, family needs, and financial goals. If you or a loved one have a personal injury claim, contact our office for a free consultation. Let us help you choose the settlement plan that safeguards your recovery and financial well-being.