Life is a very difficult journey, that is often full of unpleasant surprises. A considerable part of the income often goes un-invested. Some insurance companies and investment companies have come up with some great investment instruments, known as annuities. Sometimes these annuities are also termed as life annuities, or simply as annuity.
What is Annuity?
There is no concrete definition of the term, annuity, and at times it is simply defined as a series of incomes or income from an investment, that has been made beforehand. Usually an annuity is an insurance, typically a life insurance policy with a fixed rate of premium that the policy holder has to pay to the company.
The annuity thus has two divided phases, namely, the accumulation phase, and the phase of repayment. During the accumulation phase, the policy holder makes periodic payments to the company during a specified number of years. The insurance company makes concrete investments of these payments in some reliable sources.
The second phase of the annuity, that is the repayment phase. In the repayment phase, the already paid money is returned to the policy holder along with a genuine amount of 'interest', that has accumulated over the number of years. This repayment can be done in two ways, first in a lump sum manner, or in a structured settlement. These returns that are paid over a certain period of time are termed as settlements. There are many factors in such policies, that are bound to differ, according to terms and conditions of the policy. However, basic working of this mechanism remains the same, and the motive of the policy is fulfilled, secured, assured and guaranteed returns over investments.
Annuity Settlement Options
The following are some simple and yet successful settlement options that can be used by people.
What is Annuity?
There is no concrete definition of the term, annuity, and at times it is simply defined as a series of incomes or income from an investment, that has been made beforehand. Usually an annuity is an insurance, typically a life insurance policy with a fixed rate of premium that the policy holder has to pay to the company.
The annuity thus has two divided phases, namely, the accumulation phase, and the phase of repayment. During the accumulation phase, the policy holder makes periodic payments to the company during a specified number of years. The insurance company makes concrete investments of these payments in some reliable sources.
The second phase of the annuity, that is the repayment phase. In the repayment phase, the already paid money is returned to the policy holder along with a genuine amount of 'interest', that has accumulated over the number of years. This repayment can be done in two ways, first in a lump sum manner, or in a structured settlement. These returns that are paid over a certain period of time are termed as settlements. There are many factors in such policies, that are bound to differ, according to terms and conditions of the policy. However, basic working of this mechanism remains the same, and the motive of the policy is fulfilled, secured, assured and guaranteed returns over investments.
Annuity Settlement Options
The following are some simple and yet successful settlement options that can be used by people.
- Refund Life Annuity: It is probably the best and most suitable life annuity. The working of this policy is simple. The applicant of the policy/policy holder/annuitant, pays all the installments to the accumulation phase. After the maturity of the policy, the amount is repaid to the holder over a certain time period. The remainder of the amount is repaid to heir of the holder over a certain time period. The best thing about this policy is that there are no risks of losing money, which makes the policy a highly rated one.
- Joint Life Annuity: It is a great option that is basically a policy that has two holders. The working of this policy is quite similar to that of the refund life annuity, however in such a case there are two policy holders. After the maturity of policy, both the policy holders are repaid equal amounts over a certain time period. In case of death of a holder, the remainder amount is repaid to the other holder. This policy is suitable for married couples.
- Temporary Life Annuity: A temporary life annuity is also favorable one. In such a situation, the holder of the policy keeps on receiving the repayments till a specified period of time. The repayments, unlike other policies do not last till the death of the holder.
- No Refund Life Annuity: This policy is probably the most commonly observed one. A no refund policy means that refund lasts till the death of the policy holder.
What Is a Structured Settlement?
Despite all the legal language around them, structured settlements are simple. Many lawsuits result in someone or some company paying money to another to right a wrong. Those responsible for the wrong may agree to the settlement on their own, or they may be forced to pay the money when they lose the case in court.
If the settlement is small enough, the wronged party may have the option to receive a lump sum settlement. For larger settlements, however, a structured settlement annuity may be arranged.
In this case, the at-fault party puts the money toward an annuity, which is a financial product that guarantees regular payments over time from an insurance company.
The structured settlement agreement details the series of payments the person who was wronged will receive as compensation for the harm done to them. Structuring the money over a longer period of time offers a better future guarantee of financial security because a single payout can be spent quickly.
Structured settlements gained popularity in the 1980s after the U.S. Congress passed the Periodic Payment Settlement Act. According to the National Structured Settlements Trade Association, almost $6 billion in new structured settlements are issued annually.
Frequently Asked Questions: Get straightforward answers to common questions about a structured settlement annuity.
How Do Structured Settlements Work?
A structured settlement pays out money owed from a legal settlement through periodic payments in the form of a financial product known as an annuity. However, many legal settlements offer a lump sum payment option, which provides a one-time sum of money. The key differences between both annuity settlement options are the long-term security and the taxes. For example, money received from a personal injury case is almost always tax free when you receive it. However, once the money is yours, you’re liable for taxes and dividends from the lump sum.
There are a number of reasons why an individual may receive a structured settlement, the most common cases being:
- Personal Injury: A personal injury case is a civil case where someone who’s been harmed files a lawsuit seeking money from the person believed responsible for the harm. Money in the form of a structured settlement helps recipient pay for medical expenses or other costs.
- Workers’ Compensation: Most people know about workers compensation, which pays out workers who get injured on the job while they recover. Payments can be used for medical treatment and wage replacement during periods when injured employees are unable to work and other expenses.
- Medical Malpractice: In some unfortunate cases, doctors can do more harm than good. In this instance, injured patients or the families of deceased patients can sue for medical malpractice.
- Wrongful Death: A structured settlement is also a common way to compensate the family of someone whose death was the subject of a wrongful death claim. Families may be entitled to receive a stream of tax free payments, to replace the loss of income previously earned by the lost loved one.
Structured settlements — or structured annuities — are both financial products and legal judgements. While they function somewhat like private assets, they are also subject to complex regulations. Learn about the process of being awarded a structured settlement annuity as well as the legal protections and advantages given to structured settlement recipients through the following pages:
- Structured Settlement Payout Options: Compare and contrast the different ways to accept a cash settlement from a lawsuit.
- Government Support for Structured Settlements: Learn about how the government uses the tax code to promote the use of structured settlements.
- Structured Settlements for Minors: Read about why this type of settlement is typically used in cases involving underage children.
Structured Settlement Pros and Cons
Structured annuities are ideally suited for many different types of cases. However, once the terms are in place, they cannot be changed. For additional information on how structured settlements work, payout options, or how to access your cash award ahead of the annuity contract schedule, the Structured Settlements FAQs page can be a beneficial resource within your search.
There are a number of advantages from receiving structured settlement payments. When deciding on any financial investment, it is important to understand the benefits along with the risks.
Pros
- Structured settlement payments are tax-free.
- In the event of the recipient’s premature death, the contract’s designated heir can continue to receive any future guaranteed tax-free payments.
- Payments can be scheduled for almost any length of time and can begin immediately or be deferred for as many years as requested. They can include future lump-sum payouts or benefit increases.
- Spreading out payments over time can reduce the temptation to make large, extravagant purchases and guarantees future income. This is especially helpful if the recipient has a medical condition that will require long term care.
- Unlike stocks, bonds and mutual funds, structured settlements are not dependent on fluctuations of financial markets. Payments are guaranteed by the insurance company that issued the annuity.
- A structured settlement often yields, in total, more than a lump-sum payout would because of the interest your annuity may earn over time.
Cons
- Once terms are finalized, there’s little you can do to alter them if they do not meet your needs. You cannot renegotiate the terms if your financial situation or the overall economy changes.
- Funds are not immediately accessible in case of an emergency, and the recipient cannot invest the lump-sum payout in other investments that carry higher rates of return.
- Tapping into your structured settlement without selling payments will cost you money. You will pay surrender charges and IRS penalties if you withdraw funds before age 59½.
- Some parts of a settlement, such as attorney’s fees and punitive damages can be taxed.
- Not all states require insurance companies to disclose their costs to establish a structured settlement or lump-sum annuity. Without this information, a recipient could lose a significant amount of money from their settlement through administrative fees.
Selling Your Structured Settlement Payments
Selling Structured Settlement Payments: Find out how structured settlement recipients can access their cash award ahead of the annuity contract schedule. Learn more about topics like:
- What Is the Secondary Annuity Market?
- Key Considerations and Requirements
- Selling Payments on Behalf of Minors
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