by John Darer CLU ChFC MSSC RSP CLTC
What is the difference between a structured settlement (annuity) and an insurance annuity?".
First of all, a structured settlement describes a type of transaction which involves the release of claims against a Defendant or Respondent in exchange for some or all of the damages paid in the form of future periodic payments. A structured settlement can be funded with two types of qualified funding asset, a structured settlement settlement annuity or obligations of the United States government (typically US Treasuries).
A structured settlement annuity is an insurance annuity. Perhaps the question could be better posed as "why is a structured settlement annuity unlike all other annuities?"
- The benefits of a structured settlement are only available to those individuals who suffered a physical injury or physical sickness, to those have a derivative cause of action to someone who has suffered, or individuals who have injuries under applicable state workers compensation statutes.
- A Structured settlement annuity offers a customizable package that bundles concepts to solve multiple needs such as current income, deferred income and capital accumulation all in one product. For a link to some examples of the types of structured settlement payments that can be customized through a structured annuity, please click here. Traditional insurance annuities require an unbundled approach which may increase transactional costs.
- Structured settlement recipients enjoy income tax-free payments regardless of whether the structured settlement payments are for current income, deferred income, guaranteed lifetime income or capital accumulation. The best you can hope to achieve with a traditional insurance annuity is tax deferral. Tax deferral is not such a bad accumulation strategy, but it's not income tax free!
- A structured settlement annuity is the only financial product that offers contractually guaranteed lifetime income with tax free payments when it is used as a qualified funding asset.
- Traditional insurance annuities have more deferral forms and gimmicks than a structured settlement annuity. There are immediate annuities, deferred annuities, flexible premium deferred annuities, variable annuities, equity indexed annuities, bonus rate annuities, and many forms of each. Traditional deferred annuities may have liquidity features. However, if you are under age 59.5 beware the 10% penalty tax plus income tax on any withdrawals, not to mention surrender charges that may apply to the contract. A structured settlement annuity has no such penalties but the payments cannot be increased, decreased, mortgaged, encumbered, yada yada... to keep the tax exclusion under long established tax principles.
- Traditional insurance annuities are mainly purchased by individuals. A structured settlement annuity is not purchased by individuals. They are generally purchased by institutions called qualified assignment companies. Individuals do not own these types of annuities...they have the contractual right to receive periodic payments, funded by one or more structured settlement annuities, as part of the resolution or settlement of their claim or lawsuit.
- Knowing what you're going to get and when you are going to get it-now or in the future- is a strong reason to receive all or part of your net settlement in the form of a structured settlement annuity. Deferred income annuities are just coming on the scene for the traditional market, but the payments do not enjoy the same tax-free status as structured settlements. For more information on deferred income annuities, please click here.
- Many of the thousands of insurance agents and brokers offering traditional insurance annuities have little to no familiarity with structured settlement annuities, which are offered by a fewer number of specialist agents and brokers. To avoid potential problems caused by the lack of familiarity, make sure you are dealing with a structured settlement annuity specialist. In addition make sure that the person advising you IS NOT a member of a firm whose primary business is settlement transfers or settlement factoring. A good way is to verify that he or she is holds an active insurance license in your state and is a member of the National Structured Settlements Trade Association (NSSTA).