Up until twenty years ago, anyone who won a lawsuit as a result of a claim involving worker's compensation, wrongful death or accident had to accept a lump sum payment as their compensation. The payment would be intended to be invested, with the beneficiary living off of the proceeds for as long as their recovery was expected to take. In many cases, this type of settlement works fine, but in other cases, the results are a disaster.

It is difficult enough for someone who has been through the trauma of an accident or illness to have to adjust to a new lifestyle without having to also become an expert in the art of financial investing. If you have been active all of your life and you suddenly find yourself in a wheelchair and having to handle assets of several hundred thousand dollars or more, you could be overwhelmed. You could hire someone to handle the investments for you as well as the tax issues, but what if the person you hired wasn't trustworthy? What if you hired a greedy relative who took all of the money? What if you hired someone incompetent?

These problems, and statistics that show that people who receive large sums as compensation for accident, injury, or wrongful death often spend all of their money in a short period of time, led to Congressional action in 1982 that amended the Federal tax code to allow for structured settlements. A structured settlement is simply an agreement between the responsible party and the injured party that the payments will be made over time, rather than in a lump sum. The two parties reach an agreement, the party responsible for payment purchases an annuity, usually through an insurance company, and the injured party will receive steady income over a period of years or even a lifetime.

The payments are adjusted for inflation; the sum of all of the payments will be greater than if the amount had been paid as a lump sum. Because the payments are purchased up front as an annuity, the paying party actually pays less than the sum of the payments, as well. The result is generally a win-win situation, with the injured party receiving a steady stream of income over as long a period of time as necessary, while the paying party does not have to worry about making monthly or annual payments.

While a structured settlement is not the ideal payment arrangement in all situations where a long term injury settlement occurs, it does work well in many cases where a lump sum payout might be undesirable.