Do structured settlements earn interest? Not in the way a savings account or bond does. The life insurance company that issues the annuity behind your settlement bakes a growth component into the contract at the moment it’s purchased: the total of all scheduled future payments is larger than the lump sum the insurer paid for the annuity, and that difference functions like interest. It’s fixed on day one, it doesn’t move with markets, and under most circumstances it arrives completely tax-free.
How the Growth Is Built Into the Annuity
When a personal injury or wrongful death case settles, the defendant’s insurer usually doesn’t cut the periodic checks itself. It transfers the payment obligation to a third-party assignment company through what the tax code calls a “qualified assignment.”1Office of the Law Revision Counsel. 26 USC 130 – Certain Personal Injury Liability Assignments The assignment company takes that lump sum and buys an annuity from a life insurance company. The annuity contract spells out every future payment: the exact dollar amount, the exact date, and the total number of payments.
The growth exists because the annuity costs less upfront than the total of the payments it will eventually produce. If a settlement calls for $1.5 million in payments spread across 30 years, the insurer might pay $900,000 today for the annuity that funds them. The $600,000 gap is the built-in growth. There is no account balance sitting somewhere collecting returns. The issuer has already committed to the full schedule, and nothing about future market conditions or interest rate movements can change it.
Why It Isn’t Really Interest
A savings account, a CD, or a bond portfolio produces returns that fluctuate with the economy. An annuity behind a structured settlement does not. The payments are locked, and the recipient cannot accelerate, defer, increase, or decrease them.1Office of the Law Revision Counsel. 26 USC 130 – Certain Personal Injury Liability Assignments
That rigidity is the trade-off. You give up flexibility and the chance to chase higher returns. In exchange you get a stream of payments that will arrive on schedule regardless of what happens to markets, interest rates, or the broader economy over the payout period. For someone who needs to replace lost income or fund long-term medical care, that certainty is the point, and the “interest” question is a bit misleading because the schedule is already fully determined.
Cost-of-Living Increases
Some structured settlements include a built-in annual increase to help payments keep pace with rising prices. These escalators are set at a fixed percentage, commonly 2%, 3%, or 4%. The schedule is written into the annuity contract at the time of settlement, and it doesn’t change afterward.
These increases aren’t tied to actual inflation. If inflation runs at 6% and your contract specifies 3% increases, your purchasing power erodes over time. If inflation runs below your increase rate, you come out ahead. The escalator simply adds another layer of predictability to a payment stream that is otherwise flat. And it has to be negotiated at the outset. Once the annuity is purchased, the terms are permanent.
Why the Growth Is Usually Tax-Free
The biggest reason the growth inside a structured settlement matters is that it arrives without a tax bill. Under federal law, damages received on account of personal physical injuries or physical sickness are excluded from gross income, whether received as a lump sum or as periodic payments.2Office of the Law Revision Counsel. 26 USC 104 – Compensation for Injuries or Sickness That exclusion covers the original settlement amount and the growth built into the future payments. You don’t report the payments on your return, and you don’t owe federal income tax on any portion of them.
Compare that to taking the same settlement as a lump sum and investing it yourself. Put $900,000 into a bond portfolio earning 5%, and federal and state income tax hit those returns every year. Depending on your bracket, your after-tax return might drop to 3% or less. The structured settlement delivers the full growth rate with no tax erosion, which can amount to hundreds of thousands of dollars in additional value across a long payout.
When the Tax Exclusion Does Not Apply
The tax-free treatment is limited to damages for physical injuries or physical sickness. Emotional distress on its own is not a physical injury under the tax code.2Office of the Law Revision Counsel. 26 USC 104 – Compensation for Injuries or Sickness If your settlement compensates emotional distress that stems from a physical injury, it qualifies. If it compensates standalone emotional distress with no underlying physical harm, the growth portion of the payments is taxable.
Punitive damages are always taxable, whether or not the underlying case involved physical injury. They’re treated as ordinary income rather than as compensation for a loss. If a structured settlement includes a punitive damages component, the recipient owes taxes on those payments and the growth attached to them.
What the Growth Rate Depends On
Because the growth is built in when the annuity is purchased, its size depends on conditions that exist at that moment: prevailing interest rates, the term of the payout, the payment schedule, and the pricing offered by the insurer writing the annuity. A longer payout period gives the insurer more time to invest the premium behind the scenes, which generally translates into a larger gap between the premium and the total payout. A short payout compresses that gap.
None of that is visible to the recipient as an interest rate on a statement. What you see is the payment schedule itself: the dollar amounts, the dates, and any escalator built into the contract. The effective return can be worked out by comparing the total of the scheduled payments against the premium paid for the annuity, but there is no ongoing rate that changes from year to year. The number was set the day the annuity was bought.
Fixed for Life, for Better or Worse
The growth locked into a structured settlement is both its strength and its limitation. On the strength side: guaranteed payments, no market risk on the recipient’s end, and tax-free treatment for qualifying physical injury cases. On the limitation side: no ability to adjust the payments if your circumstances change, no upside if markets do unusually well, and an inflation risk that a fixed escalator only partially addresses.
For a searcher trying to understand whether a structured settlement is “earning” anything, the honest answer is that it’s paying out more than it cost, and that difference is the growth. It isn’t compounding in an account you can watch. It’s a promise the insurer made at purchase and will keep on the schedule written into the contract.