How A Structured Settlement Annuity Builds Compromise
An interesting statistic is that in the past decade over 5,000 different cases involving personal injury or wrongful death have resulting in the negligent party being liable for at least $1 million in damages to the victims. The vast majority of these cases were eventually settled before they ever went to trial. One of the challenges that the courts have with such cases is that they often seek lifetime financial support for the injured party. An increasingly more common answer to this problem is found in the structured settlement annuity.
What Are Structured Settlement Annuities?
Structured settlement annuities are simply periodic payments that are given in place of, or in supplement to, a single lump-sum payment. If you are unfamiliar with the concept of annuities, it may benefit you to read our article on the fixed annuity. In basic terms, an annuity is a payment that is paid out over a specified period of time.
In terms of a structured settlement, the injured party is given an annuity in place of a lump-sum settlement. This happens for a number of reasons. The first reason is that this is a way for the courts to provide the claimant a lifetime income without the risk of them not being able to handle a lump-sum payment.
Most people have proven to have a difficult time managing a large sum settlement payment. They often do not know how to handle the investment of the money or make poor purchasing decisions, and ultimately squander away the settlement long before the intended lifetime of the funds.
A good alternative for the courts was to provide this structured settlements annuity in place of the lump sum. They no longer had to worry about the claimant not being able to handle their “lifetime” benefit, but were able to provide a consistent monthly income that would last for the lifetime or need of the beneficiary.
How Does The Structured Settlement Annuity Work?
In the case of a settlement, the defendant is responsible for paying the liability owed the injured. Insurance companies will provide the injured with an immediate annuity contract that pays out benefits for the lifetime or needs of the claimant. The nature of the payments depends entirely on what was determined at the time of the settlement. The defendant owns the annuity contract and names the injured as the beneficiary of the contract.
Because the injured is not the buyer of the structured settlement annuity contract, they receive another advantage from this type of arrangement. Assuming all of the requirements are properly met, the injured receives the annuity payments income tax-free. This treatment comes as a result of ownership and economic benefit technicalities structured in the settlement.
The annuity will be structured to meet the predetermined financial needs of the injured. If the injured dies before the guaranteed funds are paid in full, the injured party’s contingent beneficiaries will receive the remainder of the payments.
Advantages and Disadvantages of Structured Settlement Annuity Contracts
There are a number of distinct advantages to all parties involved in this type of liability suit. The structured annuity benefits not only the injured party, but also the plaintiff, judges, and the general public.
The primary advantages come to the injured party. Because of the nature of the annuity contract, they are able to have financial security for the remainder of their life. The lifetime annuity is structured to continue payments while there continues to be a need for them. This also frees up the injured party from having to manage the settlement funds, and can provide peace of mind for family members who would normally have been handed that great responsibility. The payments are guaranteed for life and provide income-tax-free payments to the beneficiary. The benefits of this cannot be underestimated.
Most of the disadvantages of structured settlement annuity policies are really based upon possible future inconveniences. If the insurance company that happens to hold the contract becomes insolvent, there may be a delay in payments while the account is transferred to a new insurer. This is the primary risk of these types of accounts.
Additional Options
In recent years a secondary market for annuity payments has been introduced. If you are looking for a buyer of annuity structured settlement contracts, you may be able to sell annuity payments on the free-market. There is an increased interest from some investors to purchase all or a portion of your lifetime annuity payments. This can be a way for you to exchange your monthly payments for a lump-sum agreement with a third party. Make sure that you know what you are getting yourself into, and be sure to consult an experienced professional that is capable of handling such a transaction.
The introduction of the structured settlement annuity some years ago has proven to be a good alternative to the courts for providing lifetime support for the injured. These types of structures have removed strain on the public systems that would normally have to support such individuals. The annuity payments allow the individual consistent dependable income, and allow them to retain a portion of their previous independence.
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