A structured settlement annuity is a tool that helps a claimant ensure that the funds from a settlement will be available in the future. Before the settlement papers are signed, the claimant and the defendant agree to a payment design that includes future payments. This payment design becomes part of the settlement between the parties.
The obligation to make the future payments is generally transferred to a third-party assignment company that purchases an annuity to fund the future payments. The defendant satisfies its obligation to the claimant by sending the premium for the annuity directly to the annuity issuer. This arrangement allows the defendant to immediately recognize a tax deduction for the amount paid out while allowing the tax exclusion that applies to physical injury claims to be extended for the plaintiff to the future payments. This tax exclusion applies to the entire future payment even though a portion of each payment is attributable to the interest credited by the annuity issuer.
Structured settlement annuities provide claimants with guaranteed, tax-exempt future payments. The annuities used to fund these future payments are extremely flexible. They can be designed to meet a variety of needs such as funding future college expenses, living expenses, predictable medical spending or they can be used to provide lifelong income. Injury victims with severe injuries or poor overall health who are seeking lifetime payments may benefit from a “rated age.” A rated age will serve to increase the payout per dollar used to fund the annuity.
While the mechanics of this transaction may seem fairly complex, in practice it is fairly easy for the attorneys at both ends of the transaction. Annuity brokers generally draft and review the language required to be in the agreements and help to make everything go smoothly.
For many claimants, structured settlement annuities provide much-needed dissipation protection, guaranteed tax-free income, and financial stability. Structured settlement annuities often offer an excellent alternative to traditional investments. Not only do they offer a favorable net rate of return, they guarantee a fixed rate for the duration of the annuity contract period; a period which in many cases is the life of the annuitant. Annuitants with this guarantee can sleep much better at night secure in the knowledge that their money is guaranteed by a highly rated insurance company. This certainly relieves the burden of stress inherent in investing and can completely eliminate the question of whether one will run out of money prematurely.
Annuity payments are guaranteed by the annuity companies that offer them. Most annuity companies in the structured settlement market are rated A+ or better with AM Best.