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What Is a Structured Settlement Annuity?

If a plaintiff settles a personal injury case for a large sum, they can take the payment as a lump sum, but the defendant may offer to pay it out in installments over a period of time. That can include the defendant’s purchase of a structured settlement annuity from an insurance company that will manage the money and the periodic payments to the plaintiff.  

Typical Structured Settlement Payment Scenarios

A common format for a structured settlement is a single yearly payment for 20, 30, or even 40 years, but that may not be the only way the defendant could offer to pay out your settlement award. Here are some options to consider.

Large up-front payment.

If the plaintiff racked up a lot of living expenses or medical bills while waiting for the case to settle, they may prefer to opt for a large initial up-front payment to get back on track. They can use that money to pay those bills, pay down a mortgage, buy a new car, or get medical treatment. Then, by taking the remainder in installments to be paid out over some period of time, they can still ensure a safe yearly income stream. 

Additional amounts for expenses when needed.

A plaintiff can take the settlement in yearly installments but include a provision that would allow for a request of extra money from the award when unexpected needs arise for medical treatment or for other extraordinary expenses like college tuition.  

Payments increase or decrease over time.

It isn’t necessary to structure identical payments each year. The plaintiff can start out receiving a higher amount and decrease the payment each year, or they can start low and increase the payment over time. Some people choose to delay their payments altogether, perhaps until they reach retirement age when their income is lower. 

The Settlement as an Annuity

An annuity is a contract with an insurance company for a payout of a lump sum over a period of time. Many people use assets to purchase annuities that can serve as income during their retirement years. But they’re not limited to payments later in life. When a plaintiff settles a personal injury case and chooses a deferred payout, the defendant will likely purchase a structured settlement annuity from an insurance company. The insurance company will invest the money and manage the payment structure as payments come due.  

Types of Annuities

Many people choose a payout through a structured settlement annuity because of the potential that the investment will yield more money than they would have received otherwise. Of course, like any investment, there is always the chance that the investment will not pay off or that it might actually lose money, depending on the type of annuity that’s available. 

A fixed annuity usually carries the least risk. It will pay out a guaranteed amount over time and will offer an investment yield similar to a bank savings account.

A variable annuity is based on the performance of the stocks in mutual funds that the plaintiff chooses for their account. A variable annuity offers a higher potential than a fixed annuity but it also carries a greater risk.

An indexed annuity is tied to the performance of a stock index like the S&P 500. These usually perform better than fixed annuities, but don’t have the same potential for payment as variable annuities.  

What to Consider

The way a plaintiff chooses to structure a settlement will depend on different factors. A plaintiff will want to consider:

  • How he or she plans to use the money, 
  • When they think they will need it, 
  • How much they’ll need at one time, 
  • Whether the structured settlement annuity will replace their income, 
  • Whether they have the expertise to manage a large sum, 
  • Whether they can have access to additional amounts as needed, and 
  • Whether there are tax consequences. 

The plaintiff will also have to factor in additional charges they might incur if they choose to take out more of the principal than they are scheduled to receive or if they cash out the annuity altogether. And, a not insignificant consideration can be whether the plaintiff can need to fend off scammers, relatives, friends, and strangers looking for handouts. Smaller payments could mean fewer headaches. 

There are as many choices in structured settlement annuities as there are plaintiffs to choose them. It is highly recommended that plaintiffs consult with their attorney and a CPA who can help them determine the type of structure that will work best for their circumstances. 

If you have a structured settlement and need access to your cash now, consider contacting Tribeca Capital. We may be able to help gain access to those funds even if you’re already receiving your structured settlement in the form of an annuity. Call us at (866) 388-2288 now. 

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