by John Darer CLU ChFC MSSC RSP CLTC
What is the difference between and annuity and a structured settlement?
An annuity is a financial product issued by life insurance companies and sold by licensed and appointed agents and/or brokers that is designed to receive and grow funds from an individual and then, upon annuitization, distribute a stream of periodic payments to the individual at a later point in time. Annuities can be fixed ,variable or participate in one or more financial indexes.
- Annuities are primarily used by individuals as a means of securing a stable cash flow for an individual during their retirement years.
- A structured settlement is a method to pay damages in the form of one of more streams of periodic payments when a lawsuit is settled.
- A structured settlement annuity is a customizable specialty annuity purchased by defendants, insurers or assignment companies, that is used as a "qualified funding asset" to help resolve legal disputes or litigation. Multiple needs can be addressed in a single structured settlement annuity contract, or a series of contracts. You do not have to structure all of your settlement.
- A structured settlement can be funded with a structured settlement annuity or with United States Treasury obligations [see IRC 130(d)
- A structured settlement may also be funded with periodic payment reinsurance if the paying party is an insurance company.
Important Caveat A so-called Secondary Market Annuity, SMA or In-Force Annuity as those terms are used with investors IS NOT an annuity. A so-called Secondary Market Annuity, SMA or In-Force Annuity IS NOT a structured settlement either according to my colleague Patrick Hindert, the co-author of Structured Settlements and Periodic Payment Judgments. Those terms are slapped onto Structured Settlement Derivatives, by marketers of investments in structured settlement payment rights [which are defined under the Internal Revenue Code at IRC 5981]