Structured Settlements: How Annuity Payments Are Valued and When to Sell

Last updated: 2026-10-25 · Reviewed against its sources 2026-10-25

A structured settlement is a financial arrangement in which a personal injury or workers' compensation claim is resolved through a series of periodic tax-free payments rather than a lump sum. The payments are funded by an annuity purchased by the defendant's insurer and are governed by IRC § 130. Once established, the payment schedule is fixed — but the recipient can sell some or all future payments to a factoring company in exchange for a discounted lump sum, subject to court approval.

How a structured settlement is set up

At settlement, the defendant (or their insurer) assigns its obligation to make future payments to an assignment company, which purchases an annuity from a life insurance carrier. The annuity is irrevocable and structured to match the agreed payment schedule. The claimant receives no lump sum — only the future payments. The tax advantage is significant: under IRC § 104(a)(2) and § 130, all payments, including the growth inside the annuity, are excluded from the recipient's gross income. A $1,000,000 lump sum invested and earning 5% generates taxable income; a $1,000,000 structured settlement does not.

Common payment structures

• Level payments: Equal payments for a defined period (e.g., $2,500/month for 20 years).
• Increasing payments: Payments that grow at a fixed rate (e.g., 3% per year) to keep pace with inflation.
• Deferred lump sums: Large future payments at specific milestone dates (e.g., $50,000 at age 18, 25, and 35).
• Life contingent payments: Payments that continue for the recipient's lifetime, or for a guaranteed minimum period — whichever is longer.

Present value: what a payment stream is worth today

The present value (PV) of a structured settlement is the lump sum that, invested today at the discount rate, would exactly replicate the payment stream. The formula for a level annuity is:

PV = PMT × [1 − (1 + r)^−n] / r

Where: PMT = periodic payment, r = discount rate per period, n = number of periods.

Worked example:

• $2,000/month for 15 years (180 payments)
• Discount rate: 6% per year (0.5% per month)
• PV = $2,000 × [1 − (1.005)^−180] / 0.005 = $2,000 × 118.50 = $237,007

The discount rate choice has an enormous effect on present value. A factoring company buying your payments will use a higher discount rate (10–18%) to profit from the transaction — which means they offer significantly less than the actuarial present value.

Selling structured settlement payments

Federal law (the Structured Settlement Protection Acts, modeled on the Uniform Law Commission's act and enacted in most states) requires court approval before any sale or transfer of structured settlement payments. The court must find the transfer is in the seller's best interest before approving it. This protects recipients from pressure selling but also adds a processing time of 30–90 days.

When you sell, the factoring company effectively charges you through the discount rate they apply. A company offering to buy your payments at a 15% discount rate is paying you only the present value calculated at 15%, which is significantly less than the present value at the 6% rate the original annuity assumed. The effective cost of selling:

Discount = Annuity PV (at low rate) − Cash offered (at high rate)

On the $237,007 example above at 15% annual discount rate:

PV at 15% = $2,000 × [1 − (1.0125)^−180] / 0.0125 = $2,000 × 69.70 = $139,396

You would receive $139,396 for a stream worth $237,007 at a fair rate — a discount of $97,611 (41%). Selling structured settlement payments is expensive and should be a last resort.

When selling may make sense

• Immediate medical need that cannot wait for future payments
• High-interest debt (credit cards, payday loans) where the debt cost exceeds the settlement discount
• Business investment with a documented return exceeding the discount rate

Selling for ordinary expenses or to satisfy a payday lender at 400% APR when the sale costs 15% is financially rational. Selling to buy a car or take a vacation is not.

How the structured settlement calculator works

The calculator lets you enter your payment schedule, the present-value discount rate, and the factoring company's offered rate. It outputs the present value at each rate, the dollar discount, and the percentage cost of the sale. Use it to evaluate whether a specific buyout offer is reasonable before proceeding to a court hearing.