Many people hear the words “annuity” and “structured settlement” and assume they mean the same thing. While annuities and structured settlements do share a number of similar qualities, there are a few distinct differences that set them apart. Here’s a brief overview of each:
What is an Annuity?
An annuity is a fixed sum of money that is paid to an individual over a specific time period. The terms are established through a contract between an individual and an insurance carrier or an investment firm. The individual purchases the annuity; the annuity then pays the individual back in a series of periodic payments (including any interest earned) over a set period of time.
Characteristics of annuities can vary depending on the product, but commonly include:
Many people choose to include annuities as the anchor of their investment portfolios. While the returns are generally conservative, the payments are guaranteed to provide a stable source of income. There is another type of annuity that offers additional tax benefits, but only to individuals involved in certain types of legal settlements: structured settlement annuities.
What is a Structured Settlement?
A structured settlement is a type of annuity product that is available to claimants who receive settlement proceeds from personal injury, workers’ compensation, and wrongful death lawsuits. Unlike other types of annuities, a structured settlement annuity is 100% income tax-free. Instead of the claimant purchasing the annuity directly, the defendant (or insurance company) uses a third-party assignment company to purchase a structured settlement annuity, which then makes a series of periodic payments to the claimant over set period of time. The claimant decides whether to use a portion or all of the settlement proceeds to purchase the structured settlement annuity. Many claimants find that the guaranteed payments provide peace of mind during what is often a tumultuous time. Here are some characteristics of structured settlement annuities:
The decision to structure a portion or all of the settlement proceeds must be made prior to finalizing the settlement. There is certain language that must be included in the settlement agreement to allow for the structured settlement annuity.
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Disclaimer: Traci Kaas does not provide legal or tax advice.