Annuity and Structured Settlement: The Differences Explained
Along with the growing number of people holding both structured settlements and annuities, there is an increasing confusion about what they are and if they are the same thing. The short answer is ‘no’; annuities and structured settlements are not the same, though they are related and if you hold either one you should understand something about them, so you have all your options known.
At root, both an annuity and a structured settlement comprise a guaranteed income stream to the holder – each month (or quarterly or yearly, depending on how they are structured) the payee receives a check for an agreed upon amount of money. However, each comes into existence a bit differently, and each has different legal ramifications for the holder.
An annuity is something a person can buy
In fact, most people have a version of an annuity in their life insurance policy. But for purposes of this discussion, instead of death benefits, the kind of annuity we are talking about makes payments on a scheduled basis before you die. In the U.S. these annuities are only available through a life insurance company. Advantages for such an annuity include:
- A fixed rate of return (or a guaranteed minimum rate of return).
- Tax benefits (deferral of income tax, or beneficial tax treatment).
- A guaranteed stream of income (particularly attractive in retirement).
A structured settlement, on the other hand, is not purchased; rather, it is established as part of an agreed upon settlement in a tort suit instead of a lump sum payment. There are two broad paths to awarding a structured settlement: awarded as part of a worker’s compensation suit, or as a settlement in a personal injury case. In both of these cases, the court plays a role in setting up the structure of the payment stream. The court will also play a part if the holder ever wishes to sell some or all of the payment stream (a common occurrence).
Structured settlement is purchased while annuity is guaranteed
Ironically, though annuities and structured settlements are not the same, the payer of a structured settlement will very often buy an annuity as a guaranteed way of meeting their obligation – so while they are created and managed in entirely different ways, the two payment streams are very related indeed!
In one time arrangement, the victim must suit his budget to the payment received. This is particularly challenging when the sufferer is immobilized for the longer duration of time. The sufferer shall have to manage the medical expenses, domestic expenditures, etc. within the compensation received, and there is the likelihood of the cash depleting. Instead, under the Structured Annuity payout, the sufferer has got the settlement for a longer period. He’s assured of some monthly income till he recovers. With this amount, the victim can maintain his family, pay children’s college fees, the expenditures towards food, medical expenses, etc. As a total result, the victim’s lifestyle is not influenced. This type of negotiation is becoming more and more popular now.
A lot of people are not clear on the dissimilarities between annuities and structured settlements. Maybe for the reason that they have some similarities in the way that they perform in that in most cases they offer a monthly or yearly set amount of income. From then on, the similarities virtually end.
Some very basic information about this subject matter is listed below, and while not designed to be all-encompassing it should be sufficient enough to give a general put together of the variations between your two.
– An Annuity is a financial instrument designed and frequently provided by an insurance or investment company to provide an investor a set and sometimes slightly guaranteed rate of come back on that investment. Insurance companies provide a type of insurance that is categorised as “variable life” or some variable on that term that not only provides purchase a established amount of coverage on the life as long as they pass away, but also builds up a nest egg for the kids that after a place amount of time the purchaser may then start to sketch against and offer them an every month or annual income.
- There is the rest of mind that comes with knowing how much you will receive for the rest of your life and that the funds will not run out.
- The annuity you will be offered by the provider will invariably be higher than what is obtainable with a standard annuity. Qualifying for it may amount to as much as 40% increase in comparison with the lowest possible standard annuity. Whether you will receive more or less than this amount is dependent on your specific health or lifestyle condition.
- You are allowed by law to take out 25% of your pension pot as a tax-free lump sum. This amount is known as the pension commencement lump sum payment and can be withdrawn before you hand over the pension pot to purchase the annuity contract.
- You will be able to include options that will allow you to protect the income against inflation or provide for your beneficiaries. You can equally elect to have your income continuing for a guaranteed period after you have passed on. However, if you select these options, you will receive slightly lower income.
- Once you are secured, it is not possible for you to change it. So even if your medical condition worsens, you will have to make do with the amount you have been locked to. From the onset, you may decide to increase your annuity income in line with the inflation figures, but this means accepting reduced initial income.
- If you pass on immediately after taking out an annuity contract, the amount used in funding the purchase cannot be returned even if you have not received up to half the invested amount.
- The process of getting an enhanced annuity is elaborate, so you will need to talk to an annuity expert.
– A structured settlement is something that is usually honored to an individual by a court docket of law following a lawsuit following a major accident whether it be an automotive mishap that triggered severe injuries, a personal injury suffered in the workplace, or other situation where a person was triggered physical harm anticipated to disregard or the actions of someone else, company, or business. These instances may differ from the items mentioned previously to things such as product liability situations, where someone is harmed by defective faulty and making products, to health care related injuries induced by an inattentive plastic surgeon or medical doctor. Most people are familiar with the word “malpractice.” That term gets used a lot in medical care field.
So while both an annuity and a structured settlement can and frequently do provide a collection amount of income to a person, the real reasons for the payout are very different. That is not to state that an individual who received funds could not use the amount of money and invest it into an annuity-type product to try and gain even more income over time, but that is clearly a discussion for another article.