Structured Payout Annuities
The Structured Settlement Annuity Explained
Immediate annuities have many uses, but they are primarily purchased to address financial guarantees for individuals and families. An immediate annuity is often purchased in conjunction with a structured settlement for just this reason. A structured settlement is a monetary agreement between a plaintiff and a defendant. The injured party (plaintiff) receives damages in the form of a stream of income from an annuity purchased by the defendant.
Structured settlements use annuities based largely on the guarantees provided by the insurance contract and the safety associated with these products. An annuity policy can be tailored to provide a systematic payment for a set number of years- up to the insured’s lifetime.
Settlements typically arise from personal injury suits such as vehicular accidents, medical malpractice, product liability and workers’ compensation cases. In such cases, the plaintiff is often in need of financial stability for an extended period of time. An immediate annuity will provide this guarantee while also affording tax advantages.
Tax Advantages Of A Structured Settlement
Under Internal Revenue Code (IRC) section 104(a)(2), gross income does not include damages received in a lump sum or through periodic payments due to physical illness or injury. In other words, the IRS considers structured annuity payments from a settlement agreement as tax-free income to the recipient. Furthermore, Revenue Ruling 79-220 allows the plaintiff to assign the liability of the future payments to an “assignee” such as an insurance company. That is to say the insurance company takes on the responsibility of the payments once the annuity is funded.
The funds used to purchase the structured settlement are income tax free provided certain conditions are met. The assignee must assume liability and this liability is to be no greater than the party who assigned it, the periodic payment must be fixed and cannot be altered by the recipient and the payments must be excludable under the IRC section 104(a)(1).
Payment Options
The injured party can receive a settlement as a lump sum, through a structured periodic payment from an annuity or in a combination of the two. Periodic payments will provide future guarantees to replace income and provide for large future expenses such as medical needs or living expenses. The annuity has an additional benefit of a declared internal interest rate. The future payments held by the insurance company will earn interest for the plaintiff, helping to offset inflation, and increasing the amount of the payout.
Unfortunately, many settlements taken in a lump sum dissipate after only a few years. In fact, many large, improperly managed settlements tend to be exhausted after only five years or less. Conversely, the tax advantages associated with a structured settlement are designed to counteract this dissipation by providing guarantees long after the settlement is reached.
As with any annuity purchase, it is important to choose a knowledgeable agent and a highly rated, stable and well capitalized insurance company. At Ohio Insurance Plan we work with experienced insurance companies who have successfully written structured settlement annuities for many years.
Note: Attorney’s fees can be included in the structured settlement as well. This allows the plaintiff’s attorney to defer income for future events such as retirement or college expenses for children. A qualified tax advisor can provide consultation concerning payments to the plaintiff’s attorney through a settlement agreement.
Contact us to discuss structured settlement accounts.
