In the wake of the perennially high inflation juxtaposed against low interest rates, particularly for retirees, the temptation of succumbing to any apparently genuine-sounding investment strategy like annuity structured settlement, so as to meet their long-term financial goals is indeed overwhelming.
Inevitably, this results in the proliferation of fraudulent as well as authentic fixed income investment plans, albeit not with the appropriate kind of understanding.
However, using a platform known as structured settlement, it can be possible to earn an interest rate of 5-7%, the increased returns can indeed by guarded by reduced risk.
Interestingly, the attractive return that is relative to other low-risk investments is attributed to insufficient liquidity in the first place and not due to heightened risk. In other words, such investment plans do have the potential to yield higher returns via a liquidity premium as opposed to risk premium.
What is a Annuity structured settlement?
A structured settlement typically comes into the picture when a plaintiff (who initiates a lawsuit) is declared the winner of a lawsuit – for example – in a personal injury or medical malpractice case. The plaintiff is asked to stop taking legal action against the defendant in lieu of receiving damages through a series of payments spread across a fairly long period in time, the duration of which often depends on the existing age level and the nature of injury as well as other factors.
For example, the stretch of this settlement would be different for an injured child that is entitled to receive bulk payment after it turns an adult from someone who is a 40-year old adult who is eligible to obtain yearly payments for the next 15-20 years followed by a lump sum at the age of say, 65.
However, in order to cushion the plaintiff who expects the defendant or the defendant’s insurance company to make the payments over a period of several years or even decades, the defendant decides to buy an annuity from a reputed insurance firm to help carry out the payments and resolve the settlement using a single, large lump sum or structured, time bound payments.
A structured settlement typically assures the plaintiff of regular payments spread over a number of years. This system is particularly useful in cases where the plaintiff suffers a debilitating type of injury called catastrophic injury that is permanent in nature. Using the platform of a structured settlement, the insurer of the defendant finances an annuity policy to fund the plaintiff. An annuity is intended to result in a regular amount of income throughout the tenure of the settlement.
A structured settlement is being increasingly perceived as a lucrative podium to obtain significant tax benefit since the settlements relating to personal injury are deemed tax-free as per the US Tax Code, although certain exceptions can impose taxes on some parts of the settlement, like the announcement of accrued interest on the settlement.
Secondly, structured settlements provide plaintiffs with the peace-inducing guarantee that they would be getting the certainty of obtaining payments for a certain period of time. That being said, lump sum payments are known to be more suitable for those suffering from serious injuries that necessitate medical expenses or those who are minors and can afford to wait for a long time.
In a number of US states, insurance laws on annuities safeguard them so as to make sure the insurer fulfills its obligations. Most states do provide an outlet for insurance players that go bust. In such cases, policy claims would still be covered and accounted for by the state’s guaranty association although it will be subject to some rules.
An annuity structured settlement can also be used in conjunction with lump-sum to fund emergent expenses like debt repayment, hospital bills and house-repairing costs.
Another key benefit is that the participants can also dedicate the settlement’s funds to accommodate the possibility of unexpected medical advances and developments that can cure the plaintiff or treat them better.
One of the key pitfalls is that some aspects of a annuity structured settlement are indeed taxable, like the attorney’s fees, punitive damages and emotional harm.
Another note of caution for the plaintiff is the fact that untoward changes in economic conditions like inflation can render many annuity payments appear insignificant, regardless of the scale or duration of the structured settlement
Also, a plaintiff cannot own the annuity policy, or else the tax benefits will cease to benefit. As opposed to paying the money to you, the defendant will dispatch the amount to the subsidiary of a life insurance company, known as assignment company. It is this assignment company that will purchase the annuity from its parent insurance firm and hold this policy, subsequently paying you each month for as long as the contract stipulates.