Understanding the definition of a structured settlement financial arrangement can help you make some informed decisions about your budget and help you manage your money better. The basic structured settlement definition is as follows: "A financial arrangement that involves periodic payments or installment payments for a certain award amount". Structured settlements are typically set up when an insurance company agrees to pay another party a certain award amount, or when a financial company is attempting to resolve a claim and is obligated to pay a certain amount in settlement monies to another party.

Structured Settlements Defined

Structured settlements are regulated by both state and federal laws and some regulations do prevent the sale of a structured settlement annuity or a structured insurance settlement. The structured settlement definition is listed in the Internal Revenue Code Section 5891(c)(1) which states the structured settlement arrangement must meet the following requirements:

  • A structured settlement must be established by:
    • A suit or agreement for periodic payment of damages excludable from gross income under Internal Revenue Code Section 104(a)(2)
    • An agreement for the periodic payment of compensation under the workers' compensation law excludable under Internal Revenue Code Section 104(a)(1); and
  • The periodic payments must be of the character described in subparagraphs (A) and (B) of internal Revenue Code Section 130(c)(2) and must be payable by a person who:
    • Is a party to the suit or agreement or to a workers' compensation claim; or
    • By a person who has assumed the liability for such periodic payments under a qualified assignment in accordance with Internal Revenue Code Section 130

The structured settlement definition as described above was defined solely for the purpose of defining what types of settlement arrangements are subject to taxes in the event of a sale. The structured settlement definition may change slightly depending on the circumstances, and will be defined in court.

Understanding the Definition of Structured Settlements

Taking the time to understand the definition of structured settlement arrangements can help you make the most informed decision when you are interested in selling the settlement or want to serve as a structured settlement buyer. Remember that laws and regulations pertaining to structured settlements vary from state to state, so working with a lawyer can help you better understand what your rights and tax obligations are under this type of financial arrangement.

Structured settlement arrangements offer a number of benefits for the claimant, and for many people, an installment payment arrangement works out better than receiving a lump sum payment because it provides a steady stream of income. Periodic payments are exempt from Federal taxes and are sent on a predictable schedule. For many people, this type of payment arrangement provides financial security and freedom. The settlement may be awarded only in periodic payments for the full length of the agreement, or in lump sum periodic payment combinations. The majority of claims professionals, judges, defense attorneys and plaintiff attorneys support the use of structured settlements in the claims process because they can provide better benefits over time for both parties involved.