Why §104 is unlike every other annuity in the U.S. tax code
Most annuities are tax-deferred at best. You delay the tax; you don't avoid it. A regular non-qualified annuity uses the "exclusion ratio": each payment is part return-of-basis (tax-free) and part interest (ordinary income). You pay tax on the growth eventually.
In a qualifying §104 structured settlement, every periodic payment is excluded from gross income (Rev. Rul. 79-220). That covers principal, interest and growth, federally and in states that follow the federal exclusion, with no NIIT and no Medicare add-ons, for the entire term. It's the same statutory exclusion that makes the underlying personal-injury recovery tax-free; the structure just preserves that treatment across the payment schedule instead of collapsing it into a single lump-sum check.
In dollars: $50,000 a year from a §104 structured settlement is $50,000 in your pocket. The same $50,000/yr drawn from a taxable account at a 24% effective rate is $38,000 in your pocket. Over a 20-year term that gap is six figures, sometimes seven.
Authority: IRC §104(a)(2); Treas. Reg. §1.104-1(c); Rev. Rul. 79-220 (periodic-payment exclusion); IRC §130 (qualified assignments).
What is the tax bill on your sale going to be?
Send me the sale price and rough basis and I'll email you the actual number within one business day, plus the Seller's Guide to §453. If it doesn't fit your deal, I'll tell you that plainly.
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Run your numbers.
Put in the lump-sum equivalent of your settlement and the period you'd structure it over. The calculator compares the tax-free structured stream against taking the lump and investing it in a taxable account.
Not every settlement is tax-free. These are.
§104(a)(2) excludes damages received on account of personal physical injuries or physical sickness. It's the broadest exclusion in the Code for plaintiff recoveries, but the line is hard:
- Qualifies (tax-free): Personal-injury, wrongful-death, medical malpractice, product liability with physical injury, premises liability, motor vehicle, FELA (railroad), Jones Act (maritime), workers' compensation.
- Tax-free only for physical components: Sexual harassment / Title VII with documented physical injury or sickness; some emotional-distress damages where physical symptoms originated the claim.
- Does NOT qualify (taxable): Pure emotional distress without physical origin, defamation, employment discrimination without physical injury, breach of contract, most class action settlements, punitive damages (even in physical-injury cases, see O'Gilvie v. United States).
For taxable settlements, structuring still helps via deferral (spreading the income across years), but the analysis is different and the math is closer to the attorney fee calculator than this one. Different code section, different mechanics.
The one real cost.
Irrevocability. Once the train leaves the station, it goes to the next station. No matter what.
Any structured payment stream is irrevocable. Once funded, you can't unwind it.
In a §104 settlement, a §453 installment sale, and a structured attorney fee under Childs alike, the carrier-funded annuity is non-commutable and non-assignable by you, the payee. That's a structural requirement of the favorable tax treatment in all three regimes. If the payments were freely convertible to cash, the IRS would treat the whole arrangement as a Year 1 lump-sum receipt under the constructive-receipt doctrine, and the tax-free (§104) or deferred (§453, Childs) treatment would collapse.
So you can't sell the income stream. You can't pull a lump sum if something comes up. You can't change the schedule once the carrier issues the annuity. It's a one-way door. That's the cost of the tax treatment.
It's a Swiss train. It shows up on time, and it pays out.
The obligor on your payment stream is the assignment company that takes over the defendant's obligation, and it funds your payments with an annuity from a highly rated U.S. life insurer operating under regulated reserve requirements. The payment is scheduled every month, for exactly the dollar amount printed on the contract.
Your payments depend on the assignment company and the claims-paying ability of the insurer behind its annuity. They are not FDIC insured, and you should not count on state guaranty association coverage.
No. It runs the opposite direction. J.G. Wentworth and similar factoring companies buy existing structured-settlement payments at a steep discount (50 to 60¢ on the dollar) from people who already have a structure and want a lump sum out. That's the exit side. You're on the entry side: you use your settlement proceeds to buy a brand-new annuity directly from a highly rated life insurer (A or better by A.M. Best or equivalent) at face value, with full §104 tax-free treatment. Same two words on Google, but the money flows the other way.
Every claim here traces back to a public source.
Read what the IRS, mainstream CPAs, plaintiff-side tax attorneys, and highly rated insurers themselves publish about IRC §104(a)(2) and qualified assignments under §130. Nothing on this calculator is a marketing claim. It's the consensus reading of a statute that's been in the Code since 1918.
For a deeper read on the §453 cousin (structured installment sales for property/business sales), see the What the Pros Say page: CPA Journal, Kitces, ABA articles, and insurer white papers. Different code section, same evidentiary backbone.
These numbers are illustrative. Real quotes come from carriers.
The "annuity effective payout rate" slider is a stand-in for what a highly rated insurer will actually quote on your case. Real-world rates depend on (a) current Treasury yield curve, (b) payment shape (period-certain vs life-contingent vs joint-life), (c) recipient profile, and (d) carrier competition at the moment of placement.
Typical period-certain payout rates in the current rate environment: 4.5 to 6.0% for 15 to 25 year terms. Life-contingent and joint-life designs often quote higher because mortality credits get added in. The calculator above lets you stress-test the math at any rate; the real number lands when we pull live quotes from multiple carriers and stack them.
Timing rule: the structure has to be designed and signed before the settlement papers are executed. Once the plaintiff has the right to a lump sum, the constructive-receipt doctrine collapses §104 treatment on any subsequent structure. If your case is in mediation, a settlement conference, or a court-approval hearing, you are in the window.
Settling a case in the next 90 days?
Structured settlements have to be designed before the settlement papers are signed. Attorney fee deferrals follow the same timing rule. If your case is approaching mediation, settlement conference, or a court-approval hearing, this is when the conversation matters.
Call Hans · 213-414-2808 Attorney fee calculator →People also ask
How much will a $100,000 annuity pay out per month?
It depends on the term and the rate the insurer quotes on the day it is funded. As an illustration only, at this calculator's default 5.5% rate, $100,000 paid monthly over 20 years is about $688 a month, and over 10 years about $1,085. Real structured settlement quotes come from the insurer at placement.
What is the downside of structured settlement?
It is irrevocable. Once funded you cannot change the schedule, take a lump sum or sell the payments without a court-approved transfer, usually at a steep discount. Fixed payments lose buying power to inflation unless you add an increase, and payments depend on the assignment company and the claims-paying ability of the issuing insurer.
Are structured settlement payments taxable?
Not for personal physical injury or physical sickness. IRC §104(a)(2) excludes those damages from income whether paid as a lump sum or over time, so the payments, including the growth built into them, are tax-free. Punitive damages, pure emotional distress and employment or contract claims are taxable, and structuring those only spreads the income.
How much does a $600,000 annuity pay per month?
As an illustration at this calculator's default 5.5% rate, $600,000 paid monthly for 20 years is about $4,127 a month, or about $6,512 over 10 years. A life-contingent payout depends on age and health, and the actual figure is the insurer's quote on the funding date.
Related
- Structured attorney fees
- What the assignment company does
- Childs v. Commissioner
- What if interest rates rise
Sources: 26 U.S.C. §104 (Cornell LII); 26 U.S.C. §130 qualified assignments; IRS Publication 4345, Settlements and Taxability. Checked October 3, 2026.
