What Is an Annuity or Structured Settlement?


Annuity and structured settlements are popular payment methods for lawsuit cases, lottery payments or other large payment awards. They pay money over time as opposed to a lump sum settlement option. There are many reason a person or an awarding entity may choose a structured settlement as opposed to a lump sum payment.


An annuity is a product sold and managed by an insurance company. Annuities can be either immediate or deferred. Money that remains in the account is sheltered from taxes until the money is withdrawn. In terms of a large settlement, you may be given the option to annuitize, or this may be part of the settlement requirements. When this happens, the money is placed in an annuity with you as the annuitant, and a payment schedule is created. There are two types of annuitization options: life certain or period certain. Life certain provides an income for your entire lifetime, while period certain provides income for a specified number of years.

Structured Settlement

Structured settlements use annuities to hold and distribute the money from a large settlement over time. There may be more than one reason for this. It may be a tax consideration to take the income over time instead of all at once. It can also protect the settlement awardee from exhausting her resources quickly through poor cash management. Many people make extravagant purchases or help every needy relative that shows up at their doorstep. A structured settlement can help to prevent a person from losing everything quickly.


There are two major disadvantages to taking a structured settlement. The first is limiting resources. When a person has a structured settlement, she doesn't have access to the bulk of her money that could be used for a home purchase or automobile. This makes many people feel trapped to live by the means set for them. Many people who receive structured settlements are disabled and unable to find further work, and so they are completely at the mercy of their settlement payments. The second disadvantage is the investment potential. Even if a person doesn't need the money immediately, she may realize that the annuity company is earning money off of her lump sum while she could be earning that money personally while taking the same amount of income.

Selling a Structured Settlement

There are companies that buy structured settlement annuities. These are advertised on television claiming that they can get you your money fast. Many states actually restrict the sale of structured settlements because, while they are an attractive means to get large sums quickly, they are not always in the best interest of the annuity owner. If you own a tax-free structured settlement, there are also federal restrictions to selling a structured settlement annuity. Realize that these companies don't do this for free and will often take as much as 1/3 of your lump sum balance. Consult with an attorney regarding your rights, the laws and what is a good offer.

Your Best Interest

If you are considering taking a structured settlement, make sure your best interests are being kept at the forefront. Have a neutral third-party financial advisor review the insurance company's strength and confirm that no excessive commissions will be taken. Don't automatically allow your attorney to place the annuity if he happens to also be a licensed insurance agent. Make sure you are given proper disclosures about your counsel's financial interest in your case. In some cases, you may want to split your settlement among several insurance companies to diversify your money and lower your risk.

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