What is a Structured Settlement?
A structured settlement is a negotiated financial agreement, typically resulting from a personal accident injury or wrongful death legal claim. It provides the injured plaintiff with compensation through an Annuity Structured Settlement, where losses are disbursed in the form of periodic payments over time rather than in a single lump sum.
Structured settlements allow plaintiffs to receive a steady income stream over many years, helping cover medical expenses, loss of wages, and other costs related to long-term injuries or disabilities. The structured settlement annuities are customized based on the plaintiff’s projected future needs and may include features like annual cost-of-living adjustments.
In most cases, structured settlements are funded through the purchase of annuities by the defendants or their insurance companies. An annuity issuer then handles making the periodic payments according to the settlement terms. This provides tax advantages, as the Fairfield structured settlement payments are exempt from income tax.
What is an Annuity?
An annuity is a financial product offered by insurance companies or other financial institutions that provides fixed income in the form of periodic payments. It is NOT inherently part of a legal settlement. The buyer pays a lump sum premium, and in return, they receive structured settlement annuity payments over a specified number of years or for life.
Annuity contracts are commonly used to fund retirement but also to provide lifetime income for winners of large jackpots. They offer a high degree of customization, with options to attach riders, change beneficiaries, alter payment schedules, and more. There are several types of annuities, including fixed, variable, immediate, and deferred annuities.
Key Differences Between Structured Settlements and Annuities (2023)
While structured settlements and annuities share some common traits, they have important distinctions:
- Origin: Structured settlements arise from legal settlements, while annuities are financial products purchased by individuals.
- Purpose: The purpose of a structured settlement is to provide an injured plaintiff with long-term compensation for losses. Annuities mainly provide guaranteed retirement income.
- Funding: Structured settlements are funded by defendants or their life insurance companies, who are required to provide compensation. Annuities are funded voluntarily by the individuals who will receive the payments.
- Flexibility: Annuities offer more flexibility and customization in terms of payment options and features. Structured settlements tend to provide fixed, standardized payment schedules.
- Parties Involved: Structured settlements involve the plaintiff, defendant, both parties’ lawyers, a settlement broker, and an annuity issuer. Annuities only involve the purchaser and an insurance company.
- Selling Payments: It is very difficult to sell future structured settlement payments, requiring court approval. Annuities can typically be sold freely, albeit with surrender charges.
- Tax Implications: Structured settlement payments are income tax-free per federal law. Selling annuities may generate taxable income.
Similarities Between Structured Settlements and Annuities
Despite their differences, structured settlements and annuities share a few key traits:
- They both provide fixed periodic payments, often monthly, over many years.
- Their goal is to provide long-term financial security.
- Payment amounts and schedules can be customized in both, to align with future needs.
- Annuities are commonly used to fund the periodic payments in structured settlements.
- Once established, the fixed regular payments of both can be difficult to convert to a lump sum payment.
How Structured Settlements Work
When a personal injury claim case settles, or a jury awards damages, the plaintiff has the option to accept a structured settlement rather than a single lump sum. Here is an overview of how they work:
- The plaintiff and defendant, along with their attorneys, negotiate the details of the structured settlement, including payment amounts, schedule, length, and other terms.
- A structured settlement broker helps facilitate the process. They may structure multiple alternative payment options to meet both parties’ needs.
- Once a settlement agreement is reached, the defendant funds the structured settlement by purchasing an annuity through an assignment company (usually a subsidiary of a life insurance company).
- The assignment company then assumes responsibility for making the periodic payments directly to the injured plaintiff.
- Payments continue according to the set schedule, often many years into the future or even for the plaintiff’s lifetime.
- These payments are tax-free under federal and state law.
Structured settlements provide injured victims with steady tax-free income over time without having to manage a large lump sum settlement payment. However, the fixed payment schedule also provides less flexibility should financial needs change.
There are several types of annuities, each with unique features and benefits:
- Immediate Annuities – Begin paying out within one year of purchase. Often used to fund retirement.
- Deferred Annuities – Payments start years or decades after purchase. Allow assets to grow tax-deferred.
- Fixed Annuities – Provide guaranteed, predictable payment amounts — lower risk than variable annuities.
- Variable Annuities – Payment amounts fluctuate based on underlying investments. Offer higher potential returns.
- Indexed Annuities – Provide a minimum guaranteed rate of return plus potential for higher growth linked to market indexes.
The most common payout phases are:
- Accumulation Phase – Assets can grow until payouts start, providing tax-deferred growth.
- Payout Phase – Guaranteed payments are received for a fixed period or life. Various payout options are available.
- Death Benefit – Remaining value passes to beneficiaries and bypasses probate.
Riders and other features can be added to provide benefits like lifetime income, long-term care coverage, and death benefit guarantees. But these often come with additional fees.
Annuities can provide reliable retirement income if structured appropriately. However, high fees and limited liquidity can make them problematic for some buyers. Thoroughly understanding all the options is key.
Selling Structured Settlement or Annuity Payments
Some recipients may later choose to sell their future structured settlement or annuity payments in exchange for an immediate lump sum. There are a few key differences:
- Structured Settlements – These payments cannot be sold without court approval, and a judge will only allow this in extreme circumstances. The sale is tax-free.
- Annuities – It is typically much easier to sell annuity payments. However, surrender fees often apply if done prior to a specified date, and taxes may be owed on the income.
- Recipients who sell future payments receive a discounted lump sum, sometimes only 50-70% of the total remaining value. This should be carefully considered before selling.
Consult an attorney or financial advisor before attempting to sell structured settlement or annuity payments. All options, fees, and tax implications should be fully understood beforehand.
Getting Financial Professional Advice
Given the complexities and implications involved, it is prudent to ask a professional annuity consultant when considering a structured settlement or annuity:
- Structured Settlements – An experienced structured settlement broker can advise you during settlement negotiations and help maximize benefits.
- Annuities – A financial advisor can explain the array of annuity types and options and help you select appropriate products.
- Legal Counsel – Consulting a personal injury attorney or estate planning lawyer is also recommended to understand legal and tax considerations.
Take time to carefully weigh all alternatives presented. Clarify fees, risks, and potential restrictions on your financial future before committing. With professional guidance, you can make fully informed decisions about these tools.
In summary, structured settlements and annuities share some common traits, like providing fixed payments over time. However, they have distinct differences in their origin, purpose, flexibility, and parties involved.
Structured settlements arise from legal cases and provide customized income streams to injured plaintiffs. Annuities are voluntary purchases that offer standardized options for guaranteed retirement income.
If you ever receive a substantial amount of money in a personal injury settlement or other means, be sure to educate yourself on all the options. With the help of financial and legal experts, you can choose the best approach for your unique situation.
Bara is a seasoned expert in the structured settlement and annuity field, with a successful career in structured settlement factoring. Her experience spans prominent companies such as J.G. Wentworth, Peachtree Settlement Funding, and Liberty Settlement Funding, where she managed substantial marketing campaigns. Constantly updating her knowledge, Bara is committed to providing exceptional experiences and maintaining her position as a trusted professional in the industry.