In 1982 Congress enacted the Periodic Settlement Act which adopted certain rules to encourage the use of structured settlements to resolve medical malpractice and serious personal injury cases. Under a structured settlement, an injury victim does not receive compensation for his or he injuries in one lump sum. Instead, the injured party will receive periodic payments which will be made over an agreed upon period of time.
The major benefit of a structured settlement is that the full amount of the structured payments are tax free to the injured party. If a lump sum payment was to be received by an injured party all earnings made upon that lump sum are usually fully taxable. Because a structured settlement is a voluntary agreement made by the injured party, payments can be tailored to meet the needs and requirements of that party in determining the times that the payments will be received.
In a structured settlement agreement, in most cases, the defendant (usually an insurance company) agrees to find a type of investment vehicle that will provide for a future stream of income. The preferred way of funding is thought an annuity usually purchased through a life insurance company.
It is recommended that you at least investigate a structure settlement agreement, if at all possible, to see if that choice provides you with an attractive alternative to a lump sum payment. Naturally, this decision should be discussed at length with your attorney and any other professionals who can properly assist you in this decision.