Advantages of a Structured Settlement Annuity
- Matching income with future needs and goals: Structured settlement annuities are flexible enough in design to allow future expenses to be offset by future income. Structures can be paid monthly, annually, semi-annually, in a series of lump sums, deferred up to 20 years before starting, and even payable for the rest of a client's life. Structures are perhaps best suited to meet the known future income needs of settlement recipients – thus providing the baseline financial support many settlement recipients desperately need.
- Tax Savings: The principal and interest earned on structured settlement annuities for personal injury victims are completely tax exempt (see IRC 104(a)(2)). Structured settlement annuities established for settlement recipients of taxable damages cases, while not tax exempt, are tax deferred, allowing the recipient the opportunity to take advantage of substantial tax savings (see taxable damages cases above).
- Guaranteed Rate of Return: Structured settlement annuities are fixed annuities – not variable annuities. Fixed annuities will pay the exact amount stated at the time the annuity quote is presented and is found in the annuity contract. Structured settlement annuities are offered and guaranteed by some of the strongest and well-known life insurance companies in the world (click here for a list of companies and their financial ratings). This guaranteed rate of return means the settlement recipient does not have to worry about fluctuations in the stock market or worry about their future payments losing value. While any guarantee is only as good as the company backing it, these companies listed here offer guarantees to each structured settlement recipient that their future payments will be paid as outlined in their annuity contracts. This guarantee allows settlement recipients tremendous peace of mind.
- Medical underwriting: Structured settlement recipients who desire lifetime payments can also benefit from medical underwriting. Medical underwriters at each participating life insurance company can review the medical history of a prospective annuitant and assign a "rated age" which is based on that individual's particular health history. The rated age, rather than the individual's biological age, is then used to price the lifetime annuity – resulting in higher annuity payouts per premium dollar. In serious injury cases, the rated age can be significant and can greatly improve the future payments to the injured individual.
- Flexible design: Structured settlement annuities are unlike traditional annuities in that their payment design is not limited by 72(u) and other tax rules. Structured settlement annuities can be designed to pay out in almost any manner conceivable. This flexibility allows injury victims and taxable damage settlement recipients the ability to match future payments to their particular future needs and goals in a unique way.
- Creditor Protection: Structured settlement annuities also benefit their recipients by protecting their future income from the claims of future creditors. In most States, annuities are protected from the claims of creditors.
- Guaranteed Lifetime Income: Structured settlement annuities can protect settlement recipients from the fear and worry of outliving their resources. Lifetime annuities guarantee that annuitants will have the ability to meet some or all of their future income needs. The peace of mind this creates for many annuitants can not be overstated.
- Dissipation Protection: Structured settlement annuities offer protection against premature dissipation of funds by providing payment streams often based on the annuitants life.
Disadvantages of Structured Settlement
- Cannot be changed or accelerated: Structured settlement annuities are very flexible in design but, once funded, cannot be accelerated or changed for any reason.
- High discounts rates when sold: The only way to access liquidity from a structured settlement annuity is to sell all or a portion of the future payments. These transactions, called factoring, usually require annuitants to sell payments for a heavily discounted lump sum amount.
- Low relative rate of return: Structured settlement annuities compare well against traditionally safe investments such as bonds. However, when compared to more risky options like securities they do not always fare as well.