Structured Settlements: What Are They?

January 6, 2009

The most spectacular form of structured settlements are lottery payments. Rather than deal with the financial hit of handing out a single check for tens to hundreds of millions of dollars, state governments with lottery programs buy an annuity that’s guaranteed to pay out the entire promised amount, usually at a discount – the annuity holder invests the money in bonds or other stable investments, sufficient to pay out the annual payment and turn a bit of a profit for the annuity holder.

The other common use of structured settlements is in court damage cases and they work in much the same way. A plaintiff wins a judgment in court for damages and the defendant will typically buy an annuity to pay out the damages on an annual basis, putting the payment schedule in the hands of the annuity holder. From a corporate tax purpose, purchasing the annuity is a one-time-charge and there are several advantages to doing this. The structured settlement type payment is the result of changes in federal laws dating back to 1982 and is meant to provide a steady stream of income for the recipient to pay for long term care for disability or injury payments.