Structured Settlement is in fact a legal settlement. This settlement is like paying out an annuity. Structured settlement usually includes some tax advantages for the receiver and a savings for whoever is paying.
Annuities are paid out in structured settlements. These annuities work instead of a large sum and paid out fast. The annuities are paid by the defendant’s insurance company. The company “buys” the annuity. And the type of the annuity determines the payee’s potentiality to receive the payments.
Types of Structured Settlement Annuities
Structured Settlement Annuities are classified as the following two types:
- Buy & Hold Annuity: If an insurance company holding the annuity gets bankrupt than they are still required to fill up the gap. But this is applicable only if the recipient has a buy & hold annuity.
- Guaranteed Assignment Annuity: It guarantees the annuity, but the recipient doesn’t get rest of the annuity if the insurer gets bankrupt.
How It Works
Structured Settlement Annuity is a complex term. So let me describe it easily by a flow of events:
Event 1: Suppose you work at some factory. One day you forgot to turn off a power switch of a lathe machine at the end of the day. A worker accidentally falls on the machine, the machine turns on, and the worker gets physically injured. This leaves the worker injured & in impossibility to work in the future.
Event 2: The worker sues you, because if you turned off the power switch this might not have happened. It was your responsibility and you neglected it.
Event 3: So now the insurer settles for 5 million dollars. But instead of paying that money to the victim, they offer an annuity on lieu of 5 million dollars. And the worker gets named as the annuitant. But he will not own the annuity, your insurer will.
Event 4: The insurance company pays the victim in a monthly or yearly basis for his lifetime. It may contain lump sums at interval. But the worker gets financial support which he can rely on.
This is only a simple demonstration. But this is the main structure of getting or paying a structured settlement annuity. The annuity will be determined according to the type of the case.
And by the way… Did You Know that…
- Structured settlement annuities are declared as tax-free by the Internal Revenue Service (IRS)?
- Structured settlements usually get approved by the court and are encouraged by the Federal Government?
- These annuities are often bought for plaintiffs under the age of 18. This keeps the money safe until they are grown up enough to get it.
Financial writer Suze Orman stated about structured settlements that it “provides ongoing income”. And for that, annuity agreement plays a big shot role in structured settlements. But a wrong agreement may not let that happen. So always read your options before you sign that form.