What a structured settlement is
Instead of one lump sum, part or all of a settlement is paid over time, usually through an annuity bought from a life insurer. Payments can be monthly or yearly, fixed or rising, for a set period or for life. They are common in large claims and claims for minors.
Present value in plain terms
A dollar paid in 10 years is worth less than a dollar today, because today’s dollar could be invested. Present value converts a stream of future payments into what it is worth now, using a discount rate. The higher the rate, the lower the present value.
Comparing with a lump sum
If a lump sum offer is higher than the present value of the payments at a reasonable rate, the lump sum is worth more. If it is lower, the payments are. Structured payments also offer tax-free growth for injury settlements and protection against spending the money too quickly.
Selling payments later
Companies buy structured settlement payments for cash, but they use high discount rates, so their offers are far below the payments’ value. State laws require a court to approve the sale. Run their offer through this calculator before you agree.
Questions people ask
What discount rate should I use?
A rate close to what you could safely earn on a lump sum, often 4% to 5% in recent years. Buyers of structured settlements use 9% or more.
Are structured settlement payments taxable?
For physical injury settlements, payments are generally tax-free, including the growth built into the annuity.