Structured Settlement Annuities
A structured settlement annuity is a tool that helps a claimant ensure that the funds from a settlement will be available in the future. While there are many positive aspects of structured settlements, a wise settlement planner will balance a claimant’s expectations, goals, and needs in order to allocate the settlement most effectively. This includes balancing the advantages and disadvantages with what the claimant needs and wants for his or her future.
Advantages & Disadvantages of a Structured Settlement Annuity
There are many reasons to consider using structured settlement annuities to resolve your personal injury or taxable damage case. A few advantages and disadvantages are briefly summarized below:
Advantages of a Structured Settlement Annuity
- Matching income with future needs and goals: Structured settlement annuities are flexible enough in design to allow future expenses to be offset by future income. Structures can be paid monthly, annually, semi-annually, in a series of lump sums, deferred up to 20 years before starting, and can even payable for the rest of a client’s life. Structures are perhaps best suited to meet the known future income needs of settlement recipients – thus providing the baseline financial support many settlement recipients desperately need.
- Tax Savings: The principal and interest earned on structured settlement annuities for personal injury victims are completely tax-exempt (see IRC 104(a)(2)). Structured settlement annuities established for settlement recipients of taxable damages cases, while not tax-exempt, are tax-deferred, allowing the recipient the opportunity to take advantage of substantial tax savings.
- Guaranteed Rate of Return: Structured settlement annuities are fixed annuities – not variable annuities. Fixed annuities will pay the exact amount stated at the time the annuity quote is presented and is found in the annuity contract. Structured settlement annuities are offered and guaranteed by some of the strongest and well-known life insurance companies in the world. This guaranteed rate of return means the settlement recipient does not have to worry about fluctuations in the stock market or worry about their future payments losing value. While any guarantee is only as good as the company backing it, the companies use by Amicus offer guarantees to each structured settlement recipient that their future payments will be paid as outlined in their annuity contracts. This guarantee allows settlement recipients tremendous peace of mind.
- Medical underwriting: Structured settlement recipients who desire lifetime payments can also benefit from medical underwriting. Medical underwriters at each participating life insurance company can review the medical history of a prospective annuitant and assign a “rated age” which is based on that individual’s particular health history. The rated age, rather than the individual’s biological age, is then used to price the lifetime annuity – resulting in higher annuity payouts per premium dollar. In serious injury cases, the rated age can be significant and can greatly improve the future payments to the injured individual.
- Flexible design: Structured settlement annuities are unlike traditional annuities in that their payment design is not limited by 72(u) and other tax rules. Structured settlement annuities can be designed to pay in almost any manner conceivable. This flexibility allows injury victims and taxable damage settlement recipients the ability to match future payments to their particular future needs and goals in a unique way.
- Creditor Protection: Structured settlement annuities also benefit their recipients by protecting their future income from the claims of future creditors. In most states, annuities are protected from the claims of creditors.
- Guaranteed Lifetime Income: Structured settlement annuities can protect settlement recipients from the fear and worry of outliving their resources. Lifetime annuities guarantee that annuitants will have the ability to meet some or all of their future income needs. The peace of mind this creates for many annuitants can not be overstated.
- Dissipation Protection: Structured settlement annuities offer protection against premature dissipation of funds by providing payment streams often based on the annuitant’s life.
Disadvantages of Structured Settlement
- Cannot be changed or accelerated: Structured settlement annuities are very flexible in design but, once funded, cannot be accelerated or changed for any reason.
- High discount rates when sold: The only way to access liquidity from a structured settlement annuity is to sell all or a portion of the future payments. These transactions, called factoring, usually require annuitants to sell payments at a discounted lump sum amount.
- Low relative rate of return: Structured settlement annuities compare well against traditionally safe investments such as bonds. However, when compared to more risky options like securities, structured settlements generally offer a lower rate of return.