People often use "structured settlement" and "annuity" interchangeably — but they are not the same thing. A structured settlement uses an annuity as its funding mechanism, which is where the confusion starts. Understanding the difference matters because the rules about taxes, transferability, and your legal rights are very different for each.
What Is an Annuity?
An annuity is a contract between you and an insurance company. You pay the insurance company a lump sum (or a series of contributions), and in return, they pay you a regular income stream — either starting immediately or at a future date. Annuities are used for retirement planning, estate planning, and other long-term savings goals.
When you buy an annuity yourself, you are the owner. You can often surrender it for cash value (though surrender charges may apply), change beneficiaries, or take withdrawals. The growth inside a deferred annuity is tax-deferred, meaning you pay income taxes when you eventually withdraw the money — not while it grows.
What Is a Structured Settlement?
A structured settlement is a legal agreement that comes out of a lawsuit. The defendant — or their insurer — funds your future payments by purchasing an annuity from a life insurance company. That annuity is the engine behind your payments, but you do not own the annuity. The insurance company that issued it does. You only have the right to receive the payments it generates.
This distinction — not owning the underlying annuity — is what makes structured settlements unique. It also means you cannot simply call the insurance company and ask to cash it out. To access the value early, you must go through a formal court-approved transfer process.
Side-by-Side Comparison
| Feature | Structured Settlement | Personal Annuity |
|---|---|---|
| How it starts | Created as part of a legal settlement | Purchased directly by an individual |
| Who owns the contract | The annuity issuer (insurance company) | You (the purchaser) |
| Federal income tax | Generally tax-free (IRC §104 for physical injury) | Tax-deferred growth; withdrawals taxed as ordinary income |
| Early access | Requires court approval to sell payments | Surrender options available; may have fees |
| Transferability | Can sell payment rights to a factoring company (with court approval) | Can assign or surrender depending on contract terms |
| Legal protections | Structured Settlement Protection Acts in all 50 states | Standard insurance regulations; no special SSPA protections |
| Payment flexibility | Fixed at the time of the legal settlement | Often flexible; can choose payout options |
| Common uses | Personal injury, workers' comp, wrongful death | Retirement savings, income planning |
Tax Treatment: The Biggest Difference
Tax treatment is where structured settlements clearly win over personal annuities.
Structured Settlements
Payments from a structured settlement that compensates for physical injuries or physical sickness are completely excluded from federal income tax under IRC §104(a)(2). You pay no federal income tax on the payments, no matter how large they are or how long they last. This is a statutory exclusion, not a deduction — it does not even appear on your tax return.
This tax-free status is extremely valuable over a long payment stream. A $3,000 monthly structured settlement payment is worth significantly more after tax than a $3,000 annuity payment, which would be partially or fully taxable as ordinary income.
Personal Annuities
With a personally purchased annuity, only your original contributions (called the "basis") come back to you tax-free. The earnings that have accumulated inside the annuity are taxed as ordinary income when you withdraw them. If you bought an annuity with pre-tax retirement funds (like in an IRA), all withdrawals are fully taxable. Withdrawals before age 59½ may also trigger a 10% IRS penalty.
Similarities Between the Two
Despite the important differences, structured settlements and personal annuities do share some traits:
- Both are funded by life insurance companies and are only as secure as the insurer behind them.
- Both provide predictable, regular income over a defined period.
- Both can include death benefit provisions that continue payments to beneficiaries.
- Both involve calculating present value to understand what future payments are worth in today's dollars.
- Both can be structured for a fixed period, a lifetime, or a combination of both.
Transferability: Can You Sell Either One?
Selling Structured Settlement Payments
You can sell your right to receive future structured settlement payments to a factoring company. The buyer pays you a lump sum today and collects your future payments. This transaction requires a court hearing in every U.S. state — a judge must approve the sale as being in your best interest. The discount rate applied typically ranges from 9% to 18%, meaning you receive less than the face value of the payments you are selling.
Use our free lump sum calculator to estimate how much a buyer might offer for your specific payment stream.
Surrendering a Personal Annuity
If you own a personal annuity, you can usually surrender it to the insurance company for its current cash value. During the surrender period (often 5–10 years after purchase), surrender charges apply — typically starting around 7–10% and declining over time. After the surrender period ends, you can withdraw the full value without penalty, though you will owe income tax on the gains.
No court approval is needed to surrender a personal annuity. This makes accessing a personal annuity easier than selling structured settlement payments, but the tax consequences can be significant.
Which Is Better?
Neither is universally "better" — they serve different purposes. If you received a structured settlement as compensation for a physical injury, you already have it. The key question is whether to keep the payments or sell them. If you are considering buying an annuity for retirement purposes, that is a separate financial planning decision entirely.
What matters most when you have a structured settlement is understanding your options: you can keep the payments, sell some or all of them, or sell only a portion. Our Should I Sell? quiz can help you think through whether selling makes sense for your situation.
This article is for educational purposes only and does not constitute legal, tax, or financial advice. Consult a qualified professional before making decisions about your structured settlement or annuity.