The Benefits of a Structured Settlement Annuity
Structured settlements are technically agreements by which an insurance company will contractually agree to pay an individual a set, predetermined amount of funds for a specific amount of time. These tools are typically used in the financial resolution of personal and/or physical injury claims.
How Structured Settlement Annuities Work
Structured settlement annuities provide their holders with a series of periodic, tax-free, payments over time. Because these annuities are funded by a fixed income annuity that is backed by an insurance company, the recipient can generally be assured that their payments will arrive as expected.
Yet, because payments that come from a structured settlement annuity will typically be counted on throughout the remainder of the recipient’s life, it is a good idea to first verify the strength and claims paying reputation of the underlying insurer prior to moving forward. This can be accomplished by referring to the various insurance company rating agencies such as A.M. Best, Moody’s, Fitch, and Standard and Poor’s.
Documentation that is required in setting up a structured settlement annuity include the structured settlement agreement itself, as well as an application for the annuity, and a court order – provided that a particular claim is being made by a minor.
How Are Payments Set Up On a Structured Settlement Annuity?
The payments that are received via a structured settlement annuity can be set up to last throughout the duration of the recipient’s – or claimant’s – life. The actual amount of payment may be made up of equal installments, or the recipient may alternatively opt to receive varying amounts over time. Payments that are received as a result of a structured settlement annuity are obtained free of income taxation by the claimant.
When determining how much payment to receive in each installment, as well as when the annuity payments will initially begin, it is important to consider several factors. These should include the claimant’s:
- Monthly living expenses
- Health status
- Extent of hazard in occupation (if applicable)
- Retirement plan or plans in place
It is important to note that once the amount and duration of the structured settlement annuity payment has been made and subsequently agreed upon by all of the parties involved, it should not be altered. However, should the situation arise that the original recipient is no longer able to accept the annuity payment, it may be transferred to a third party through a qualified assignment.
Advantages of a Structured Settlement Annuity
There are a number of advantages that are associated with a structured settlement annuity. These can include:
- Matching the recipient’s payment with future financial needs. Due to the flexibility of structured settlement annuities, the payments can be more closely matched to what the recipient needs for paying their living expenses. And, if the claimant does not need income right away, the commencement of annuity payments may be deferred – sometimes for up to 20 years.
- Tax advantages. Oftentimes, the receipt of both principal and interest from a structured settlement annuity are income tax free to the recipient. In addition, growth of the funds inside of the account is tax deferred.
- Rate of return is guaranteed. Because structured settlement annuities are fixed – not variable – the rate of return on the annuity’s funds is guaranteed. This can provide a great deal of peace of mind in that funds will be available to the recipient – regardless of stock market performance or an economic downturn.
- Flexible design. Unlike most regular fixed annuities, the annuities that are used in structured settlements are much more flexible in terms of paying out in nearly any conceivable manner that will best fit the income needs of the recipient.
- Protection from creditors. Another great attribute of structured settlement annuities is their protection from creditors feature. This provides additional peace of mind for the annuity payment recipient.
- Income that is guaranteed for life. One of the very best advantages of a structured settlement annuity is that the income stream from this vehicle can be guaranteed for the remainder of the claimant’s life. This means that the claimant will be able to rest easy, without the fear of outliving their assets or income.
In addition, many annuities feature a cost of living adjustment, or COLA. This means that income payments can be set up to increase over time, in turn, helping the claimant’s income to keep pace with inflation. This can be especially beneficial for younger structured settlement recipients who may be relying on this income for many years in the future.