Structured Settlement Annuity Details You Must Understand
A structured settlement annuity was introduced in the latter half of the last century as an alternative to lump-sum litigation awards to personal injury or wrongful death cases.
What Is A Structured Settlement?
The original concept of a structured settlement was first introduced sometime during the 1950s, although the structured settlement specialists were not commonplace until the 1970s. Just over the last 10 years, over 5,000 independent cases with liability damages over $1 million involving injury or wrongful death have been handed down by the courts. The vast majority of these have been settled before they went to trial and handled on a lump-sum basis.
More and more frequently the court system is seeking financial support for the plaintiff that can provide a lifetime of income. When the injured party is no longer able to work and/or provide for their families, the need for replacement income is often awarded. Although this can come in single upfront payment, most courts will accept the liability in the form of periodic payments over the lifetime of the injured.
In a structured settlement case, the defense will often work with independent personal injury claim adjusters to arrange a form of settlement in which the injured party's needs are anticipated and met. The goal is to make sure the damages suffered by the plaintiff are offset.
The structured settlement payments will generally provide for a lump-sum of cash for immediate income needs, cover the costs of litigation and expenses, and meet other current cash needs. If the settlement is such that the injured cannot work, a stream of income can be established to provide this need. These periodic payments most often come in the form of structured settlement annuities.
How Are Annuities Used In Structured Settlements?
The most common ways that annuities are used in structured settlements is to provide the periodic income payments for the duration of the anticipated need. By using a fixed annuity, the recipient may have payments paid out by the structured settlement annuity for the duration of their lifetime, or simply for the period of their estimated financial need.
If the payments do not continue for the lifetime of the annuitant, some form of fixed-period annuity is used. This type of immediate fixed annuity allows for fixed payments to be made over the course of a set period of time, for instance, five, ten, or even twenty years. If the payments step up at any time during this period, the annuity is called a step-rate annuity. For more information on how these work, see our article on annuities explained.
Advantages Of Structured Settlement Annuities
One of the primary advantages of receiving this type of structured settlement annuity payments is that the recipient can receive the income tax-free for the duration of the distribution. This is due to the fact that they annuity is not actually owned and/or controlled by the beneficiary of the payments. The legal owners of the annuity are the defendant and/or their insurer.
Aside from the tax-free status of a structured settlement, there a number of other advantages for each of the parties involved.
The best aspect of the annuity structured settlement is that the beneficiary of the annuity is guaranteed income for their foreseeable financial needs. This can help alleviate some of the stress of worrying about one's family and their wellbeing.
Further, most plaintiff's will not have a working knowledge of how to handle a lump-sum windfall from the court case, and will have much better success with a managed account that pays them period payments. The possibility of mismanaging the funds is greatly reduced.
For the judge involved in the case, it can take a significant weight off of their shoulders. Not only do they not have to determine an arbitrary structured settlement lump sum to provide for the injured party, but they do not have to worry about how said lump-sum is distributed over the course of the plaintiff's life. The annuity payments can guarantee that the insured receives payments for the extent of their need, and ensures that they do not run out of money should they live beyond life expectancy.
On the same hand, this ensures that the insured does not become a problem for the public as well. If they are ensured lifetime payments, the likelihood of them becoming dependent on the government for their wellbeing dwindles greatly.
Disadvantages Of A Structured Settlement Annuity
The primary concern with a this type of structure is that that underlying structured settlement annuity companies become insolvent, causing the insured to absorb any losses in excess of the guaranteed amounts. Although there are some protections, and the payments will not cease, the insured may only receive a portion of the intended payments.
Another concern is one common with any sort of annuity product. Annuities are notoriously illiquid. Should an immediate need arise for cash, there is no way to speed up payments or to take a larger than normal distribution from the account. Make sure you have someone that can give you some good annuity advice if this need should arise.
Structured Settlement Annuity Specialists
Life and annuity companies are particular selective with whom they do business. Only a choice few are even allowed to offer structured settlements due to the very technical nature of the arrangement. As such, most structured settlement specialists have been claims adjusters or claims representatives in the past.
A structured settlement company will typically have arrangements with roughly 12 different insurance companies. These companies do not typically allow their structured settlement brokers to sell anything other than these types of annuities. They are not allowed access to their other life or annuity products and must focus their business on the settlements.
Because of the specialized nature of the business, the specialist is often best equipped to tailor the settlement to each individual case.