Structured settlement annuities

These two terms – structured settlement and annuities – refer to two different but related concepts. When used together, they may confuse you. Let’s sort them out, shall we?

A structured settlement is basically a financial or insurance arrangement between two parties. It consists of payments made at a regular interval over a predetermined period of time. 

Personal Injury and damage claims 

Structured settlements exist in a legal context, commonly pertaining to the resolution of personal injury and damages claims. When a person or organization sues another for an event that has caused personal injury and damages, a ruling in favor of the injured party includes financial compensation. This comes in the form of a structured settlement agreement.

Apart from personal injury claims, structured settlements are also used in other cases where a cash settlement is needed. These areas include: labor compensation, employment cases, professional liability and domestic relations suits. Lottery winnings can also be paid out via a structured settlement.

Structured settlements involve three main forms of payment: an initial lump sum, a series of monthly payments, and in some cases, periodic lump sum annuities. The lump sum meets initial out-of-pocket expenses incurred or that will necessarily be incurred, while the monthly payments are the bulk of the total settlement. Periodic lump sum annuities are less common but still viable in a structured settlement negotiation.

When you refer to annuities, you are essentially referring to a legal term that has two very different meanings. In principle, however, the term annuity is a means of paying out funds at regular intervals (usually annually, hence the term ‘annuity’) over a set period of time.

Most annuity contracts involve a lump sum or a series of payments (known as premiums) paid by a person to an insurance company. In return for these payments (whether lump sum or premiums), the insurance company pays the person an annual fixed amount, or income, for the rest of that person’s life.

Since an annuity is simply a means of paying regular funds to an individual, one may enter into an annuity in any situation where a cash settlement is required. Thus, one such purpose annuity payments would serve is compensation. A good example would be a personal injury suit where the injured party is compensated for his losses using a structured settlement annuity, which he receives tax-free. This means that instead of giving him a lump sum settlement, that the company that has caused his injury pays him a fixed income over a given number of years.

Another means of entering into an annuity contract is for investment purposes, where it is called an investment-structured annuity. As we brought up earlier in this article, a pension plan for a senior citizen about to retire would be a good example of such a contract.

This type of annuity can indeed be a very sound investment. However, if you are a senior citizen who is considering buying an investment-structured annuity, such as a pension plan, look into it very carefully (preferably with an estate planner, financial planner, accountant, or similar trusted financial advisor) to ferret out all the possible hidden costs.

NEXT ARTICLE >>