by John Darer® CLU ChFC MSSC RSP CLTC
A structured settlement is a negotiated compromise between a plaintiff and a defendant in which part of the settlement includes a promise to make future periodic payments. The future periodic payments are negotiated and may be tailored to the plaintiff's specific needs.
How Are Structured Settlements Funded?
Generally structured settlements are funded with annuities, but under Federal tax law [IRC 130(d)] they can also be funded with obligations of the United States government [also known as Treasury Funded Structured Settlements].
What are Annuities?
Annuities are types of insurance contracts issued by life insurance companies that come in a variety of shapes and sizes to fit different financial needs. In general a premium is paid to secure a contractual promise to pay a defined set of payments, or payments calculated based on a fixed and determinable formula. While annuities are most often associated with retirement, billions are funded every year to meet the current and/or future income needs of personal injury victims, wrongful death survivors, employment settlement plaintiffs and more.
What's the Difference Between Structured Settlement Annuities and Regular Annuities?
Pull into your settlement planner's or financial adviser's "service bay" while your needs are elevated on "the service lift" for further examination. Regardless of whether it is a structured settlement annuity or other type of annuity, you will find that there is a variation of this financial tool to address most every need. There is a difference between structured settlement annuities and regular income annuities (SPIAs or DIAs). Structured settlement annuities can have multiple payment streams all in a single contract which is a major administrative convenience for people who receive structured settlement payments.
Is a so-called "Secondary Market Annuity" Really An Annuity or a Structured Settlement?
Very simply, NO a Secondary Market Annuity, or SMA is not an annuity at all. What is being misrepresented all over the Internet as an annuity, is actually the right to receive structured settlement payment, transferred from the original payee. The annuity itself is not transferred. Structured settlement payment rights can be sold to you by every Tom, Dick or Harry, structured settlement annuities can only be solicited and placed by licensed life insurance agents in your state. Investors can easily verify if they are speaking with a licensed agent, broker, or a bullshit artist, by checking the website of their state's insurance department, which is some states (such as New York) may be called the Department of Financial Services.
What is an Equity Indexed Annuity?
FINRA defines equity index annuities as complex financial instruments that have characteristics of both fixed and variable annuities. Their return varies more than a fixed annuity, but not as much as a variable annuity. So EIAs give you more risk (but more potential return) than a fixed annuity but less risk (and less potential return) than a variable annuity.
EIAs offer a minimum guaranteed interest rate combined with an interest rate linked to a market index,such as the S&P 500. Because of the guaranteed interest rate, EIAs have less market risk than variable annuities. EIAs also have the potential to earn returns better than traditional fixed annuities when the stock market is rising.
Equity Indexing and Structured Settlement Annuities
A form of equity indexing is available with structured settlement annuities. It's important to distinguish that in an indexed structured settlement annuity, it is the income that is indexed, while the traditional equity indexed annuity is both an accumulation and decumulation product. An Indexed Linked Annuity Payment Adjustment Rider (ILAPA) has been offered by appointed agents of Pacific Life Insurance Company and Pacific Life and Annuity Company (In New York) since April 2014, when Pacific Life received a favorable IRS Private Letter Ruling supporting the tax structure of the indexed structured settlement.
Differences in Tax Treatment between Structured Settlement Annuities and other Annuities
Generally structured settlement annuities are used to fund damages in lawsuits where the damages are exempt from taxation. It is important to distinguish that it is not the annuity itself, but what the payments represent that governs the tax consequences. For example on the one hand, properly structured settlement annuity payments for damages to someone who lost a leg in a construction accident are income tax exempt. On the other hand structured settlement annuity payments to an attorney or law firm are not tax exempt, but could shelp the attorney defer the tax on his or her contingency fees. Other annuities are used for tax deferral of interest.
Differences in Structured Settlement Annuities and SPIAs
Structured settlement annuities can have deferred start dates longer than 13 months, while traditional single premium immediate annuities cannot. Structured annuities can accommodate multiple payment streams in a single contract.
Call 888-325-8640 for more information about structured settlement annuities