Annuities are insurance contracts that individuals can purchase voluntarily, often as part of a retirement plan, to receive a stream of income payments in the future.
Structured settlements, on the other hand, result from negotiated legal settlements, typically in personal injury or wrongful death lawsuits, where the plaintiff agrees to receive compensation through periodic payments over time instead of a lump sum settlement.
While structured settlements are commonly funded by purchasing annuities from life insurance companies, not all annuities arise from legal settlements. Structured Settlements and annuities both have different purposes, ownership structures, tax treatments, and regulations surrounding their sale or transfer of payments.
What is a Structured Settlement?
A structured settlement is a negotiated financial agreement that typically results from a personal injury, wrongful death, or workers’ compensation claim. It provides the injured plaintiff with compensation through a stream of periodic payments over time, rather than a lump sum payment.
How Does A Structured Settlement Work?
When a plaintiff agrees to a structured settlement, the defendant or their insurance company typically funds the settlement by purchasing one or more annuities from a life insurance company. The annuity is then used to make periodic payments to the plaintiff over the agreed-upon time period.
The features of a structured settlement include:
What is an Annuity?
An annuity, on the other hand, is a financial product offered by insurance companies or other financial institutions. It provides a stream of payments to the annuity owner in exchange for a lump sum premium or a series of premiums.
The features of an annuity include:
Similarities Between Structured Settlement Annuity and Regular Retirement Annuity
Despite their differences, structured settlement annuities and regular annuities do share some similarities:
Both structured settlements and annuities provide a steady stream of periodic payments over a set period of time.
This feature is particularly valuable for those who have received a personal injury settlement and need a reliable income stream to cover ongoing expenses. By receiving regular payments, recipients can better manage their finances and ensure a consistent cash flow.
Another similarity between structured settlements and annuities is the ability to tailor them to meet specific needs. When setting up a structured settlement or purchasing an annuity, recipients can choose from various payout options, such as monthly, quarterly, or annual payments, as well as lump-sum payments at specific intervals.
Additionally, both options can be designed to include cost-of-living adjustments to ensure that payments keep pace with inflation.
One of the most significant benefits shared by structured settlements and annuities is the financial security they can provide. When used appropriately, these options can help ensure long-term financial stability and peace of mind for recipients. Providing a guaranteed income stream, structured settlements, and annuities can help mitigate the risk of financial hardship due to unexpected expenses or market fluctuations.
Both structured settlements and annuities offer potential tax advantages. Structured settlement payments are typically tax-free under the Periodic Payment Settlement Tax Act of 1982, allowing recipients to keep more of their settlement money. Similarly, annuities can provide tax-deferred growth, meaning that funds within the annuity can grow without being subject to taxes until they are withdrawn.
Both instruments can be structured to provide payments for the recipient’s lifetime, ensuring a consistent income source.
In many cases, structured settlements are funded by purchasing an annuity from a life insurance company, essentially using an annuity as the underlying financial instrument.
Difference Between A Structured Settlement And An Annuity
While annuities and structured settlements share some similarities, there are also several differences between the two.
Structured settlements arise from legal settlements, while annuities are voluntary financial products. The primary purpose of a structured settlement is to provide compensation since the periodic payment settlement act, while annuities are primarily used for retirement income or long-term care needs.
The defendant or their insurance company typically funds structured settlements. Annuities, on the other hand, are funded by the individual purchaser.
Structured settlements are generally less flexible than annuities, with payment amounts and schedules set when the settlement is established. Annuities offer more flexibility and control, with a variety of payout options and the ability to change the contract in some cases.
Selling Annuity payment vs. selling Structured Settlement
It is generally easier to sell or cash out future annuity payments compared to selling structured settlement payments, which often require court approval for sale or transfer.
Tax implications
Structured settlement payments are generally tax-free to the recipient, while annuity payments may be taxable depending on the specific type of annuity and how it is funded.
Final Word!
In summary, while structured settlements and annuities share the common feature of providing periodic payments, they differ significantly in their origin, purpose, tax treatment, flexibility, and ownership structure.
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