Structured Settlement vs. Lump Sum Payment
Is an annuity right for you?
Buying an annuity or deciding to settle a lawsuit with a structured settlement is an important decision that should be based mostly on your financial circumstances and needs. Often times annuities are used as for financial planning and retirement planning in particular. For example, income producing annuities can help to provide monthly income in addition to social security income in your retirement years, and depending on the type of annuity or structured settlement you have, it can pay out income for as long as you live. Many buyers of annuities and structured settlement recipients find the certainty of these predictable monthly cash flows takes a lot of weight off their shoulders to have to maintain their budgets and not have to worry if their lump sum of cash will last for their lifetime.
Is an annuity right for me?
The answer depends on several factors. Structured settlements and annuities can have significant long-term tax benefits. For example, with deferred annuities, much of the money you invest can grow tax-free prior to receiving any distributions. While you may owe taxes on income that is paid to you from your annuity, the ability to accumulate value on a tax-free basis or tax-deferred basis is an extremely powerful investment tool. In many cases, personal injury awards may be paid tax-free to the recipients, and thus the proceeds from the sale of such a structured settlement may also be tax-free. Of course you should always speak with your own independent accountant and financial advisors with respect to determining the tax effects of any financial decision. Of course, despite certain benefits of receiving a structured settlement or annuity, often times we have a need for a lump sum of money today. This may be for an emergency or for a business opportunity, and in those cases having a lump sum or if you sell structured settlement payments for a lump sum or sell an annuity for a lump sum may be necessary to achieve your financial goals.
Summary of annuity benefits
The large insurance companies that issue these annuities are often among the highest credit quality companies in the world, so your money is extremely safe when invested in an annuity. In some cases, the states where the annuities are issued have funds dedicated to cover some shortfalls if an insurance company is unable to pay when they are supposed to. You can accumulate value in your investment on a pre-tax basis, that is, your money can grow without paying taxes, thus you will have a larger possible amount at the time you start to receive taxable income.
You don’t have to think about investing. Essentially the insurance company invests you money and typically limits your downside if their investments are not good or the financial markets are unfavorable.
Annuities can be structured in many ways, they can pay you income in the near term, or grow in value to pay you money only when you need it. They can also pay for as long as you live, making retirement planning more straight-forward, and some even include death-benefit options and long-term-care riders as well.
Summary of annuity drawbacks
Often times your money will not be available to you if you need it in a lump sum. One of the reasons insurance companies can offer good returns for annuity buyers is because they know they have that investment locked up for several years. In instances where you must access you lump sum from the insurance company directly, there can be a significant surrender charge which reduces the amount of money you can expect to receive. These are the kind of circumstances that may require you to sell structured settlement payments or sell annuity payments to a buyer of these assets.
There are many types of annuities and it can be difficult to choose which type is right for you. Often there are other features, sometime called “riders” which provide benefits but need to be chosen carefully to meet your needs.
Since annuities are typically sold by insurance agents you have to find an agent you like and can trust, and that agents earn commission on any annuity they sell you. Agents must look after your financial interest and needs while also trying to earn a commission themselves.