“It is impossible for a person to begin to learn what he thinks he already knows.” – Epictetus
Introduction
That observation is particularly relevant to the modern use of the term “structured settlement.”
The term is widely used in personal injury practice. Attorneys encounter it in mediation discussions, settlement agreements, tax analyses, Medicare Set-Aside planning, transfer statutes, and settlement planning consultations. Despite this familiarity—and the assumption that its meaning is well understood—the term does not have a single controlling legal definition. Its meaning instead depends on the legal and financial context in which it is used.
Industry organizations have attempted to describe the concept in practical terms. For example, the National Structured Settlements Trade Association defines a structured settlement as “a stream of periodic payments paid to an injured party by the defendant primarily through the purchase of an annuity (fixed and determinable) issued directly by highly rated life insurance companies.”
This description reflects the traditional design of many personal injury settlements, but it is not a controlling legal definition. Depending on context, the term may refer to an industry practice, a statutory framework, a regulatory definition, or a financial product.
The phrase did not originate in statute or regulation. It emerged during the late 1970s within the liability claims industry, where insurers and defense consultants resolved personal injury claims through a combination of immediate cash and future periodic payments funded by annuities. The terminology developed in marketplace practice before legislatures and regulators began incorporating it into specific legal contexts.
For many years, this understanding accurately reflected how structured settlements functioned. Defendants and liability insurers typically controlled settlement design and determined whether a claim would resolve through a lump sum or periodic payments.
Over time, however, the landscape evolved. Legislative developments, judicial decisions, tax guidance, and changes in professional practice shifted greater responsibility for post-settlement financial decisions to plaintiffs and their advisors. As a result, structured settlement annuities are now more appropriately viewed as one component of a broader discipline commonly described as personal injury settlement planning.
This article examines that transition. It explains the origin and evolution of the structured settlement concept, clarifies the role of periodic payments within modern settlement planning, and provides a framework to help plaintiff attorneys understand how the term is used across different legal and financial contexts. It also lays the foundation for a more detailed discussion of attorney responsibilities in subsequent articles in this series.
Periodic Payments and the Legal Architecture of Structured Settlements
Although the term “structured settlement” is widely used in practice, federal tax law generally refers instead to periodic payments. At its core, what is commonly described as a structured settlement reflects a legal right to receive future periodic payments—an intangible payment right created by the settlement agreement.
The modern legal framework governing these arrangements was established by the Periodic Payment Settlement Act of 1982, which amended §104(a)(1) and (2) and enacted §130 of the Internal Revenue Code (collectively, §§104 and 130). Under §104(a)(2), damages received on account of personal physical injury or sickness are excluded from gross income. When such damages are paid over time, the periodic payments retain that tax-exempt character.
Section 130 addresses the treatment of the entity that assumes the payment obligation. Through a qualified assignment, a defendant or liability insurer transfers that obligation to a third party—typically an assignment company affiliated with a life insurer—which funds the obligation using a qualified funding asset, most commonly an annuity contract. This structure permits the transfer of the payment obligation without adverse tax consequences to the assignee.
Together, these provisions define the legal architecture associated with traditional structured settlements:
- damages excludable under §104(a)(1) or (2);
- periodic payments established in the settlement agreement;
- a qualified assignment under §130; and
- funding through a qualified funding asset, typically an annuity.
This framework supported the growth of structured settlements within the liability claims environment, where periodic payments were evaluated primarily in terms of tax treatment and annuity funding.
As settlement practice has evolved, however, periodic payment arrangements are encountered in a broader range of contexts. Plaintiff attorneys must now evaluate such arrangements not only within the traditional qualified assignment model, but also in settings where tax treatment, funding mechanisms, and regulatory considerations differ.
Qualified and Non-Qualified Structured Settlement Arrangements
Periodic payment arrangements that satisfy the requirements of §§104 and 130 are commonly referred to as qualified structured settlements.
In these arrangements, periodic payments arise from damages excludable under §104(a)(1) or (2), and the payment obligation may be transferred through a qualified assignment under §130. When these conditions are satisfied, the claimant receives tax-free periodic payments and the assignee avoids recognizing income upon receipt of the settlement funds.
Not all periodic payment arrangements meet these requirements. Claims involving employment disputes, punitive damages, certain structured attorney fees, or other non-physical injuries may produce periodic payments that do not qualify for the §104 exclusion. In other cases, the parties may elect to fund the payment obligation using assets that do not qualify as §130(d) qualified funding assets.
These arrangements are commonly described in practice as non-qualified structured settlements, although the term does not appear in federal statutes. Rather than operating within the qualified assignment framework, they rely on alternative tax treatment and funding structures—often involving assignment companies organized in offshore jurisdictions that benefit from favorable U.S. tax treaty treatment.
For plaintiff attorneys, the key point is that periodic payment arrangements described as “structured settlements” may operate under materially different legal and tax rules. Determining whether a proposed arrangement is qualified or non-qualified requires examining both the nature of the underlying claim and the method used to fund and support the periodic payments.
Statutory Definitions and Transfer Regulation
The term “structured settlement” first appeared in the Internal Revenue Code in §5891, enacted as part of the Victims of Terrorism Tax Relief Act of 2001.
Section 5891 does not govern how structured settlements are created. Instead, it regulates the transfer of structured settlement payment rights by imposing an excise tax on purchasers unless the transfer receives court approval under an applicable state statute. For this purpose, §5891 defines a structured settlement as an arrangement providing for periodic payments arising from claims described in §104(a)(1) and §104(a)(2), including workers’ compensation benefits and damages received on account of personal physical injury or sickness.
Every state and the District of Columbia has adopted a Structured Settlement Protection Act (SSPA) requiring advance judicial approval of proposed transfers of structured settlement payment rights. These statutes generally follow national model legislation and contain their own definitions of structured settlements. In some states, however, the statutory definition excludes workers’ compensation settlements, reflecting legislative decisions to regulate those payment rights under existing workers’ compensation laws rather than under structured settlement transfer statutes.
Because these statutory definitions are tied to periodic payments of damages excludable under §104, non-qualified periodic payment arrangements—such as those involving employment claims, punitive damages, or other taxable recoveries—generally fall outside the scope of §5891 and state Structured Settlement Protection Acts.
Non-qualified arrangements provide a useful starting point for understanding the limits of these statutes. A related—but analytically distinct—question arises with respect to structured attorney fees. Although a contingent fee is treated as part of the claimant’s recovery for tax purposes under Banks v. Commissioner, periodic payments made to an attorney pursuant to a fee agreement are generally understood not to constitute payments of damages to the claimant under the settlement arrangement.
Structured attorney fees may be established independently of the claimant’s recovery and can arise in both qualified and non-qualified contexts. As a general matter, contingent fee arrangements may be structured whenever the attorney has a valid right to receive fees from the resolution of a claim, regardless of whether the claimant elects to receive a lump sum or periodic payments. The legal and tax foundation for these arrangements is distinct from §§104 and 130 and is grounded instead in the doctrine articulated in Childs v. Commissioner and subsequent guidance. For a more detailed discussion, see “Understanding Childs: The Cornerstone of Structured Attorney Fee Deferrals”.
The statutory language of §5891 and most state Structured Settlement Protection Acts refers broadly to an “arrangement” providing for periodic payments. Read in isolation, that language could be interpreted to encompass certain attorney fee payment rights in particular cases. Most practitioners, however, interpret these statutes as not applying to structured attorney fees. This interpretation reflects both the distinction between damages payable to a claimant and compensation payable to counsel, and the underlying public policy of these statutes, which is to protect injured claimants who depend on periodic payments for long-term financial security.
State Structured Settlement Protection Acts reinforce this distinction. They generally define a “structured settlement” by reference to periodic payments of damages to a “payee” arising from a personal injury claim, and define the “payee” as the injured claimant or a beneficiary of that claimant. Because attorney fee payments represent compensation to counsel rather than damages to the claimant, they do not fit comfortably within this statutory framework. The required judicial findings—particularly that a proposed transfer is in the “best interest” of the payee—further underscore that these statutes are directed at protecting claimants, not regulating compensation arrangements between claimants and their attorneys.
Accordingly, while the statutory language leaves room for argument in specific circumstances, the better view is that structured attorney fee arrangements generally fall outside the intended scope of §5891 and comparable state transfer statutes. By contrast, other non-qualified periodic payment arrangements fall outside these statutes for a more straightforward reason: they are not “structured settlements” as defined by §5891 or state law.
Other regulatory frameworks adopt their own definitions for specific purposes. For example, the NAIC Model Annuity Disclosure Regulation includes a definition and an exemption for “structured settlement annuities,” and the Centers for Medicare & Medicaid Services (CMS) defines the term in its Workers’ Compensation Medicare Set-Aside Reference Guide.
These variations illustrate an important principle: the meaning of “structured settlement” is context-specific and depends on the legal framework in which the term is used. In some frameworks, such as the Social Security Act governing SSI and forming the foundation for Medicaid eligibility, the term does not appear at all, and periodic payments are evaluated under statutory concepts such as income and resources rather than as structured settlements. As a result, no single statutory definition governs how structured settlements function in modern settlement planning.
Funding Periodic Payments: Structured Settlement Annuities and Alternative Mechanisms
The role of periodic payments in modern settlement planning is reflected in the variety of funding mechanisms used to support them. Although such arrangements are often described in terms of payment streams, their legal and financial characteristics depend on how the underlying obligation is funded. For plaintiff attorneys, understanding this distinction is essential when evaluating settlement proposals.
Section 130(d) limits the assets that may be used to support a qualified assignment to (1) annuity contracts issued by licensed life insurers or (2) obligations of the United States. This limitation distinguishes traditional structured settlement arrangements from other periodic payment programs.
Structured Settlement Annuities
In practice, annuity contracts issued by life insurance companies are the dominant funding mechanism for structured settlements. They provide a practical means of generating long-term payment streams that match defined payout schedules while transferring investment and longevity risk to the issuing insurer.
Structured settlement annuities are insurance contracts issued by licensed life insurers and regulated under state insurance law. The payment obligation is established at settlement and becomes a contractual obligation of the insurer, with amounts and timing defined in advance. Many contracts include life-contingent features tied to a measuring life, typically the injured claimant. As annuity contracts issued by licensed insurers, these arrangements qualify as §130(d) funding assets and operate within both the statutory framework of §§104 and 130 and the insurance regulatory system governing life insurers.
In recent years, some structured settlement annuities have incorporated indexed-linked features. Products such as Independent Life’s iStructure Select allow periodic payments to increase based on the performance of one or more specified financial indexes, while preserving a floor that prevents payments from decreasing below defined levels. Despite referencing financial indexes, these products remain insurance contracts issued by licensed life insurers—not market-based investment programs—and continue to qualify as annuity contracts under §130(d).
Market-Based Payment Programs
Some periodic payment arrangements are funded not by annuities but by investment portfolios designed to generate periodic distributions. These market-based programs are encountered most often in structured attorney fee arrangements, but may also appear in other non-qualified contexts.
Under these arrangements, payments are determined by a formula tied to the value or performance of an investment portfolio. Although the payment stream may be described as “fixed and determinable” by formula, the amounts may vary based on investment performance, and the payee—rather than an insurer—bears the associated investment risk.
These arrangements operate under a different legal and regulatory framework. The payment obligation is not backed by a licensed life insurer, the supporting assets consist of securities rather than §130(d) qualified funding assets, and the governing rules are generally grounded in securities law. As a result, they cannot be used to fund qualified assignments and are typically used in non-qualified arrangements.
In many cases, the investment portfolio is owned by an assignment company—often organized in an offshore jurisdiction—which assumes the payment obligation under the relevant agreement. This structure is designed to avoid constructive receipt and to distinguish the arrangement from direct ownership of investment assets by the payee.
Previously Transferred Structured Settlement Payment Rights
Another type of periodic payment stream involves previously transferred structured settlement payment rights originating in earlier settlements.
In these arrangements, payment rights created in one structured settlement are acquired in the secondary market and offered to a different recipient as an income-producing stream. Although the payments originate from an annuity issued in the original settlement, the new recipient has no contractual relationship with the defendant, assignment company, or annuity issuer that created the original obligation.
These interests are often structured and sold as securities subject to federal securities regulation. Because §130(d) limits qualified funding assets to annuity contracts issued by licensed insurers or obligations of the United States, previously transferred payment rights cannot be used to fund a new qualified structured settlement. They instead function as investment assets derived from prior settlements and carry risks associated with the secondary market.
Retail Annuities
Retail annuities may also appear in settlement planning discussions, but they function differently from structured settlement annuities. They are typically purchased by the claimant after settlement proceeds are received and are owned directly by the claimant as investment assets.
As a result, they operate within the retail insurance marketplace rather than within the structured settlement framework established by §§104 and 130. This distinction has regulatory implications: structured settlement annuities are generally exempt from the NAIC Model Annuity Suitability Regulation in connection with personal injury settlements, whereas retail annuities remain subject to suitability and best-interest standards applicable to consumer insurance transactions.
Retail annuities are therefore best understood as post-settlement investment products, with different tax, ownership, and regulatory characteristics than structured settlement annuities used to fund settlement obligations.
Evaluating Periodic Payment Proposals
For plaintiff attorneys, the presence of periodic payments alone does not determine the nature of the arrangement or the governing legal framework.
Payment streams that appear similar in form may differ materially in tax treatment, risk allocation, ownership structure, and regulatory oversight. In particular, some arrangements described as “fixed and determinable” may nevertheless expose the recipient to market variability, while others provide contractual guarantees independent of market performance.
Accordingly, evaluation should focus on the underlying characteristics of the transaction rather than the terminology used to describe it. Key considerations include:
- the nature of the underlying claim and whether the arrangement qualifies under §§104 and 130;
- the identity of the obligor and whether payments are backed by a regulated life insurer or dependent on investment performance;
- the ownership and location of the funding asset, including the use of assignment companies or offshore entities;
- the applicable regulatory framework, including whether the arrangement is governed by insurance law, securities regulation, or retail annuity suitability standards; and
- the extent to which the payments are contractually guaranteed or subject to variability.
These factors determine not only the financial characteristics of the payment stream, but also how the arrangement fits within the claimant’s broader settlement plan and the professional responsibilities of counsel advising the claimant.
Structured Settlements as a Core Component of Modern Settlement Planning
As structured settlements have moved from the liability claims environment into the broader discipline of settlement planning, the term is sometimes used interchangeably with settlement planning itself. The concepts, however, are distinct—and understanding that distinction is essential for plaintiff attorneys.
Historically, structured settlements developed as a defense-driven claims practice. In that context, the term referred to a method of resolving personal injury cases through a combination of immediate cash and future periodic payments, typically funded by annuities selected and implemented by defendants and their advisors.
Modern settlement planning reflects a different professional framework. It is plaintiff-centered and focuses on how settlement proceeds should be allocated, coordinated, and preserved in light of a claimant’s long-term financial, medical, and legal needs. In this environment, periodic payments are evaluated not simply as an alternative to a lump sum, but as one component of a broader planning process that may incorporate multiple legal and financial strategies.
This evolution explains why the meaning of “structured settlement” has become increasingly context-dependent. In the liability claims environment, the term described a settlement format. In the settlement planning environment, it more often refers to a specific funding product—most notably, the structured settlement annuity—used within a broader plan.
Modern settlement planning may incorporate a range of coordinated elements, including:
- structured settlement annuities;
- special needs and pooled trusts;
- Medicare Set-Aside funding strategies;
- public benefit eligibility planning under SSI and Medicaid;
- qualified settlement funds (QSFs);
- lien resolution; and
- post-settlement investment management.
Within this framework, structured settlement annuities frequently serve as a core funding component. They provide predictable long-term income, allow payment schedules to be aligned with anticipated needs, and transfer investment and longevity risk to a regulated life insurer.
At the same time, periodic payment arrangements used in settlement planning are not limited to annuity-funded designs. Other arrangements—particularly in non-qualified contexts—may rely on market-based programs, investment portfolios, or previously transferred payment rights, each operating under different legal and regulatory frameworks and allocating risk differently.
For plaintiff attorneys, the practical implication is clear: the term “structured settlement” does not, by itself, define the legal, tax, or financial characteristics of a proposed arrangement. Those characteristics must be determined by examining how the payments are funded, who bears the associated risks, and which legal or regulatory framework governs the transaction.
Accordingly, in modern settlement planning, structured settlement annuities are best understood as a specialized funding product—often central, but not exclusive—within a broader planning process designed to address a claimant’s long-term needs.
Conclusion
The central insight for plaintiff attorneys is not that the term “structured settlement” lacks a single definition, but that its meaning depends on context—tax, statutory, regulatory, and financial.
That reality carries practical consequences. Periodic payment arrangements that appear similar in form may differ materially in their legal structure, funding, risk allocation, and regulatory treatment. As a result, terminology alone is not a reliable guide. Competent evaluation requires examining how the arrangement is constructed, how it is funded, and how it fits within the claimant’s broader settlement plan.
In modern practice, structured settlement annuities remain an important and often effective funding tool. They are no longer, however, the exclusive framework through which periodic payments are delivered. They now operate alongside other planning strategies and financial arrangements, each governed by different rules and presenting different considerations.
For plaintiff attorneys, this evolution reflects a corresponding shift in professional responsibility. Understanding periodic payments in today’s settlement environment requires more than familiarity with traditional structured settlement concepts. It requires the ability to analyze and integrate multiple legal and financial components within a coordinated planning process designed to protect the claimant’s long-term interests.
The next article in this series examines those responsibilities more directly, focusing on the role of plaintiff attorneys under the American Bar Association Model Rules of Professional Conduct.
Written by Patrick Hindert
This article represents the views of the author. Neither the author nor Independent Life Insurance Company provide tax, legal, or financial advice. The information contained herein is for general informational and educational purposes only and is not intended to serve as a substitute personalized advice from qualified professionals.
