A structured settlement pays out a legal settlement in instalments instead of one cheque. The payments are usually funded by an annuity bought from a life insurance company, and for personal physical injury cases they normally arrive income-tax-free. You can sell those future payments for cash now — but only a judge can approve the sale, and you will receive substantially less than the payments are worth on paper.

This guide covers the parts that decide whether a structured settlement works for you: how the tax treatment actually works, what the court approval requirement is for, and how the price is set when you sell. It is general information, not legal, tax or financial advice.

Where structured settlements come from

When a personal injury case settles, the plaintiff and the defendant’s insurer can agree that instead of a single lump sum, the money will be paid over years — monthly, annually, or in scheduled larger payments at set dates.

The defendant’s insurer normally funds this by buying an annuity from a life insurance company. From that point the annuity issuer makes the payments. This matters: the security of your future payments depends on the financial strength of the life insurance company holding the annuity, not on the defendant.

The tax treatment is the whole point

This is the part most articles skip, and it is the main reason structured settlements exist at all.

Compensation for personal physical injury or physical sickness is generally excluded from gross income under US federal tax law. In a structured settlement, that tax-free character carries through to every instalment — including the portion that is effectively investment growth over the payment period.

Compare that with taking a lump sum and investing it yourself: the settlement itself may be tax-free, but everything the money then earns is taxable. Over a long payment schedule, that difference is significant.

Two limits worth knowing:

Not all settlements qualify. The favourable treatment attaches to damages for physical injury or physical sickness. Punitive damages, and settlements for purely emotional distress not arising from physical injury, are treated differently.
The structure has to be set up at settlement time. You generally cannot take the cash first and convert it into a structured settlement afterwards and still get the same treatment.

Tax questions here are specific to your case. Get them answered by a tax professional before signing anything, not afterwards.

Selling your payments: the court has to agree

People sell structured settlement payments for real reasons — medical bills, a house, debt that will not wait. There is an established secondary market of companies that buy future payments in exchange for a lump sum today.

But a sale is not a private transaction between you and the buyer. Most US states have a Structured Settlement Protection Act requiring a judge to review and approve any transfer, and to find that it is in the best interest of the seller — taking into account dependants. Federal tax law reinforces this: transfers that do not receive qualified court approval trigger a heavy excise tax on the buyer, which is precisely why buyers insist on going through the court process.

Practical consequences:

A sale takes weeks, not days. Anyone promising instant money for a structured settlement is describing something other than a completed transfer.
You will attend or be represented at a hearing, and you may be asked why you need the money.
The judge can refuse. It happens.

The rules, disclosure requirements and timelines differ by state and change over time. Check your own state’s statute or ask a lawyer licensed there.

How the price is set

You will not receive the face value of your remaining payments. The buyer applies a discount rate to work out what those future payments are worth to them today, and that rate is where their profit lives.

The single most useful thing you can do is convert any offer into one number: the total face value of the payments you are giving up, versus the cash you receive. Ask for both figures in writing, on the same page.

Then ask:

What discount rate was used, expressed as an annual percentage?
What fees come out of the lump sum — legal, processing, court costs — and are they already deducted from the figure quoted?
Is this quote binding, or an estimate that can change before the hearing?

Offers vary meaningfully between buyers for the same payment stream, so quotes from more than one company are worth the time.

You do not have to sell all of it

Partial sales are common and often the better answer. You can sell a defined slice — a set number of monthly payments, or a portion of each payment — and keep the rest of the schedule intact.

If you need a specific sum for a specific purpose, work out that amount first and sell only against it. Selling the entire stream to cover a short-term need is the decision people most often regret.

Warning signs

Pressure to decide quickly, or an offer described as expiring
Refusal to put the face value and the cash amount side by side in writing
Any suggestion the sale can be completed without court approval
An advance paid to you before the hearing, framed as a favour — it makes walking away much harder
A company that will not tell you who is buying the payments

Everything we have written on this topic

Start here: what a structured settlement is

Selling your payments

The companies that buy them

Annuities and payout mechanics

Coin Abul is an independent publisher. We are not a funding company, a structured settlement buyer, a law firm or an insurer, and we do not receive payment for favourable coverage. Nothing here is legal, tax or financial advice. Structured settlement transfers are governed by state law and require court approval — speak to a licensed professional in your state before acting. See our Editorial Policy and Disclaimer.