Introduction
In a settlement situation, typically when annuities are discussed, the focus is on structured settlement annuities. A structured settlement annuity is a very basic product: Money is placed into the annuity, clients and attorneys decide at the time of settlement the timing and amounts of when the future payments will be made. Once a structured settlement annuity is established, it’s inflexible and the payout terms cannot be modified (more about this in our post on structured settlement payouts).
In certain situations, structured settlement annuities make a lot of sense for the client. One benefit of a structured settlement annuity is that the interest earned inside the annuity is tax-exempt, as discussed in our taxation of structured settlements guide (as long as the origin of the underlying claim is a personal physical injury). This is one reason why structured settlement annuities are a popular choice among plaintiff attorneys and why they're used much of the time in personal injury settlements.
However, structured settlement annuities aren’t the only option in settlement cases. It would be a disservice to the client to simply ignore other types of annuities — including many options that offer more flexibility, upside, and other features that structured settlement annuities don't offer.
There are instances where income tax benefit to the client doesn’t make a difference to the client (often because the client is in a low-enough tax bracket that they don’t regularly pay taxes). In these situations, fixed indexed annuities or other annuities that have the potential of a better rate of return than structured settlement annuities often make more financial sense for the client, especially in the current historically low-interest-rate environment. It often isn’t wise to lock in these low interest structured settlement annuity rates.
Some of the other annuity options provide a guarantee to not go down in value, but allow the client to participate in some of the overall market growth (typically up to a certain pre-capped amount). So, for example, an annuity might have a guarantee not to lose money, and also include the ability to grow up to 5% per year ((if the underlying index that the annuity is based on grows 5% or more). Because these types of annuities offer a higher potential upside with downside protection, these annuities can be a valuable part of a comprehensive settlement plan.
Conclusion
While structured settlement annuities provide tax-exempt growth and guaranteed rates of return, they are not the only annuity option that a settlement client should consider. In cases where the income tax benefit isn't going to make much of a difference to the client, or in situations where the client is likely to have significant ongoing medical expenses (and can thereby offset annuity income with the medical expense deduction), it’s worth looking at alternate annuity options.
If you want to learn more about structured settlements or the different annuities to see if they might be a good fit for one of your clients, give us a call. We'd love to sit down with you and your clients. We can explore if an alternative annuity type may make sense for your client.
