Structured Settlement Annuities
What Are Structured Settlement Annuities They And How Do They Work?
An annuity is an investment vehicle that allows one party, usually an insurance company, to receive cash or other property from a second party in exchange for the promise of periodic payments over a specified period of time. This is known as a structured settlement agreement that is based on the payout of large sums of money from a settlement of a lawsuit or other sources.
The owner of the annuity retains the contractual rights that include the authority to name the beneficiary and the date to begin the pay distributions. The person whose life is used to determine how payments are to be made is called the annuitant, who in most cases is the owner of the annuity, but not always. Someone else may be named the annuitant. The person who receives the payout of death benefits under the contract is called the beneficiary.
A structured annuity is an agreement under which an insurance company agrees to pay an individual a predetermined amount of cash for a fixed length of time if the individual meets an accident. The documents generated in a structured settlement include an agreement, a qualified assignment, an annuity application, a court order if a claim is made by a minor, and an annuity policy.
Payments for a structured settlement annuity can be made for the duration of the life of the claimant. The amount paid can comprise of equal installments, installments of varying amounts, and lump sums. The payments from a Structured Settlement Annuity are free from income-tax and are guaranteed by contract. Since a structured settlement annuity is meant for long-term financial security, it is important to get an assurance of the credentials of the annuity provider.
The periodicity of payment is entered into the settlement agreement. Factors that individuals can consider in deciding upon the date of commencement of payment, duration, and periodicity include monthly expenses, present age, extent of hazard in occupation, and retirement plans. In order to ensure that the payments remain tax-free, the structure of payments should not be altered once it has been agreed upon by both parties. In the case of a qualified assignment, the insurance company making the payment can transfer its obligation for payments to a third party.
There are issues that one should understand before opting for a structured settlement agreement. If payments are made to an estate, they are free from income tax but subject to estate tax. Purchasing a structured annuity can affect the availability of ready money with an individual.
A Structured Settlement is a tool utilized in the resolution of personal, physical injury claims. It provides tax-free, periodic payments over a period of time, specifically designed to meet an injured party's needs.
Specialized brokers facilitate the settlement process, as well as help design and negotiate the structure. Over $6 billion dollars of structured settlements are purchased annually.
- A stream of tax-free payments for a scheduled period of time.
- Meets the ongoing financial needs of the injured party and/or their dependents, including medical expenses and replacement income.
- Funded by a fixed income annuity backed by a large, financially strong life insurance company.
The overall advantage of an annuity is that it provides an established stream of income for retirement years, for a spouse or other relative, or for someone who is disabled.
Annuities can be set up to provide future income in several ways:
- Straight Life Annuities are annuities that end at your death and do not pass any value to heirs or to anyone else, thereby causing no estate tax.
- Joint and Survivor Annuities do not end when the first annuitant dies, and continues for the benefit of the surviving spouse or other remaining annuitant. Upon the death of the surviving annuitant, there is no estate tax because there is no value remaining in the account.
- Variable Annuities are set up to provide regular payments but with no set dollar amount. This annuity is based on the costs of a unit of a fund at the time of it's purchase. The payments vary according to fluctuations of the value of the unit, thereby the dollar amounts received for payments cannot be guaranteed.
- Private Annuities are purchased from corporations or other private individuals or companies. Because of tax ramifications, private annuities are complex and risky to the individual or corporation issuing them.
- Employee Annuities can be an individual or a combination of the different types of annuities applied by employers on a group basis for employees, usually as a vehicle for retirement.
To set up an annuity, talk with your accountant, tax consultant, or an attorney. It is always wise to seek professional advice before attempting to set up any type of investment vehicle because there will be tax consequences in one way or another.