About Structured Annuity Settlements

Structured annuity settlements are a method whereby the defendant in a suit can pay a larger amount of money to the person suing them without digging any deeper into their pocket. When a structured annuity settlement is in place, the insurance company that offers the annuity calculates the amount of payments and includes money in each payment to include what interest or investment returns on the investment brings. This allows the defendant to use the interest on the money as part of the settlement.

History

The use of a structured annuity settlement occurred first in the 1970s in the United States. It is one way to settle a lawsuit that gives the person receiving the settlement lower annual income so they continue to receive Medicare and Medicaid help. This is extremely important, particularly if they are in a nursing home or have ongoing medical problems. If they had the cash immediately, the plaintiff would have to pay all medical bills from the money they receive and would be unable to secure other insurance. Eventually the money would disappear and the plaintiff would have to reapply for Medicare or Medicaid. Special rules for trusts in these types of situations are part of the requirement for some settlements.

Tax Treatment

The IRS treats the settlement payments as tax free, as it would other injury settlements, as long as it fulfills specific rules. The money has to be part of a suit or payment under workman's compensation. Money for injury is normally not taxable. The payment must come from the person liable for the payment, or a person or entity that took over that responsibility, such as an insurance company. If the same payment came from an annuity payment as payment for a contest, such as the lottery, you have to pay tax on the full amount received each year because it's not part of a structured settlement.

Benefits

Aside from the fact that the payment isn't taxable and allows the individual to receive Medicare or Medicaid if applicable, the structured settlement has another advantage. It is one method of providing a constant stream of cash instead of a lump sum for persons not able to manage large sums of money. It is one method to help guarantee lifetime income.

Misconceptions

Ultimately the goal is to provide lifelong income for the person injured, but often inflation eats away at the amount of money he receives and, particularly if the person is young, he finds that after a decade or two, it's not enough to pay for all necessities.

Warning

In an effort to access all the money at once, some people sell the right to their payments to an outside company. The individual receives a lump sum and the company gets the future payments from the annuity. If the individual spends all the money immediately, they have nothing left to use for living expenses. Once you transfer the settlement, it no longer belongs to the individual.

Considerations

Several companies purchase structured annuity settlements. It's always wise to compare the amount of money offered if you have a structured settlement for sale. Many times the difference in what the companies pay in a lump sum varies by thousands of dollars.