Can I invest my tax-free lump sum settlement and still qualify for tax-free benefits on the earnings?

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Jeffrey Johnson is a legal writer with a focus on personal injury. He has worked on personal injury and sovereign immunity litigation in addition to experience in family, estate, and criminal law. He earned a J.D. from the University of Baltimore and has worked in legal offices and non-profits in Maryland, Texas, and North Carolina. He has also earned an MFA in screenwriting from Chapman Univer...

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Written by Jeffrey Johnson
Insurance Lawyer Jeffrey Johnson

UPDATED: Jul 15, 2021

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The lump sum itself, as the settlement of an injury claim, is tax-free. You do not need to pay any income tax on the amount you receive from the insurance company. Once you invest that money on your own, however, any earnings from interest or dividends are fully taxable as income at whatever your tax bracket is. That is why structured settlements are so attractive. The earnings as well as the principal are tax-free and it can be designed in many different ways to make payments to you over time.

If you have already received a lump sum and are looking for tax-free options to earn money on it, it would be wise to consult with a financial advisor or accountant. There are instruments called settlement trusts which can be either taxed or tax-free and which make periodic payments to the grantor (owner of the trust). Your attorney should be able to recommend someone to assist you with your needs.

For future reference, although there are some disadvantages to structured settlements, (see other questions and answers in this section), overall, if you want steady, tax-free, regular income for a number of years or for your lifetime, a structured settlement is the best way to go. It will give you peace of mind knowing that the money will be growing at a fairly high interest rate, it will be paid to you regularly or however it has been designed in accordance with your needs, and you will never have to pay any income tax on the earnings.

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