What is a structured annuity?There are many misconceptions about structured settlements. Most of the misconceptions come from people or companies that are trying to make money from a person's settlement or from their annuity agreement. This includes stock brokers, financial advisors, financial planners and of course those companies that advertise relentlessly on TV that they will buy your structured annuity settlement. Before making any decisions regarding a structured annuity, try to make yourself as aware of what a structured annuity is and how it can help you and your family as part of an overall settlement package.
A structured annuity is an insurance policy that guarantees you payments of specific amounts at specific times in your life. This can be monthly, quarterly, yearly or at specific ages depending upon the specifics of your settlement. All of the "interest" paid as part of the annuity is figured in at the beginning. In other words, the amount of payments that you receive under an annuity agreement will not go up or down based on current interest rates. The pre-determined interest rate, like your settlement itself, is generally tax-free (exceptions to this rule are very rare). To get these tax advantages, generally the annuity must be purchased as part of your settlement package or money must be placed into a trust solely for the purchase of an annuity contract and the annuity must be purchased very quickly.
There are many advantages to including a structured annuity as part of your overall settlement:
- All amounts received are tax-free.
- You have certainty and can plan for your future financial needs such as: college costs for children, retirement, monthly expenses, future medical needs.
- Your payments are protected from creditors. While the creditor can attach the amount you receive in any given month or year, they can not go after the annuity agreement itself.
- Your future payments are protected in the event you must file bankruptcy.
- Your funds are less likely to be squandered or manipulated. After a settlement, people will be looking to get their hands on your money. Structured annuity gives you an automatic protection against them. Studies show that the average person spends all of the cash part of a settlement within 5 years - no matter how large the settlement.
- It protects infants who might otherwise blow their money as soon as they turn age 18. In fact many courts will require that a significant portion of any child's settlement be placed in a structured annuity so that the child does not get a large sum upon turning age 18. It is typical to have payments made for college education (although the child would be free to use the money for anything once received) and payouts at specific ages such as 25, 30, 35 and 40. Where the child is likely to have special needs throughout their lives, such as someone who needs constant care, one of the best uses of the structured annuity is to make sure that there is income for the child after the parents would no longer be expected to be able to care for the child. This can ensure that the child will be placed in the best setting for their needs. Even if the settlement is small, those periodic payments can be used to cover expenses not covered by other insurance or programs.
- Most structured annuities have at least 2 guarantors. Most structured annuities are guaranteed by the company issuing the annuity and a second guarantee company. Insurance companies maintain separate guarantor companies which are asset rich. In addition, in many instances the annuity agreement may be further guaranteed by the New York State Insurance Fund.
BEWARE! Over the last 10 years many companies have sought to purchase annuity contracts from accident victims. These companies can prey upon a person's desire to have more money right now. The terms of the agreements can be ridiculously one-sided.
This became such a problem that in 2002, New York created special regulations to protect people from these companies. For any annuity agreements dated after July 1, 2002, a court must approve the sale of structured payments from the injured party. The courts have looked at the terms of these agreements and have quite often refused to allow the transfer where there is really no need for immediate money and in instances where the amount that the person would receive is very small in comparison to what they are transferring.
Most lawyers will spend a good deal of time making sure that your settlement package, including annuity payments, will meet your needs in the future. While emergencies can pop up when it may be a good idea for you to transfer all or a portion of an annuity agreement, absent dire circumstances, it is rarely to your advantage to try to cash in an annuity agreement. In addition, more and more annuity agreements, especially where it is for a child, will prohibit any transfer at any time.
Is my lawyer recommending a structured settlement because he/she makes a commission?
No! It would be an absolute conflict for an attorney to make any money from the placement of a structured annuity on your behalf. At the very minimum an attorney would be required to disclose that to you and even then it would be prohibited. Generally, an attorney cannot take a commission from an insurance company. When the settlement requires a compromise order (infant, death, incompetent) the attorney must represent to the court that they have absolutely no interest in the settlement other than the fees and expenses disclosed in the application for a Compromise Order. Be careful of who is trying to get you to believe this myth. Quite often financial planners or stock brokers who want you to invest your money with them will tell you this to try to steer you away from getting a structured settlement. Things that a stock broker cannot represent to you are: that they can guarantee your payments equal to or greater than what you would receive under the structured annuity, that you will receive the same tax benefits from a structured annuity, or that they can guarantee you that you will make more by investing with them.