What is a Structured Annuity – Several Different Viewpoints

What is a Structured Annuity

Structured Annuities

Structured Annuities

A structured annuity, also known as a structured settlement or a periodic payment judgment, is an annuity or group of annuities with a very short accumulation phase funded by a lump sum payment similar to a single-pay annuity. It is typically funded by an insurance company or other third party after it is ordered to pay a tort claim in a court of law. Structured annuities are often used to pay worker’s compensation claims or other lawsuit winnings through a monthly income guaranteed for life as opposed to a lump sum.

Structured Annuity Overview

Structured annuities were first introduced in the 1970s. Today many consider them advantageous over lump sum payments, particularly for individuals with permanent disabilities, because they guarantee a lifetime income and discourage individuals from irresponsibly spending large amounts of money over a relatively short period of time. The structured annuity concept has the endorsement of many disability advocacy groups.

Starting a Structured Annuity

It is important to remember that the plaintiff awarded damages cannot start a structured annuity. It must be requested that the party ordered to pay the awarded damages (usually an insurance company) do so on their behalf, either by mutual agreement or by court order. Because of the myriad of laws and regulations surrounding structured annuities, one should maintain the counsel of an attorney throughout the structured annuity funding and distribution process.

Distributions for a structured annuity are very flexible. The annuitant can request distribution payments as frequently as weekly, and can also request that payments be made in differing levels in anticipation of future financial needs such as medical equipment replacement or college expenses.

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An annuity is a contract between you and an insurance company that is designed to meet retirement and other long-range goals, under which you make a lump-sum payment or series of payments. In return, the insurer agrees to make periodic payments to you beginning immediately or at some future date.

Annuities typically offer tax-deferred growth of earnings and may include a death benefit that will pay your beneficiary a specified minimum amount, such as your total purchase payments. While tax is deferred on earnings growth, when withdrawals are taken from the annuity, gains are taxed at ordinary income rates, and not capital gains rates. If you withdraw your money early from an annuity, you may pay substantial surrender charges to the insurance company, as well as tax penalties.

There are generally three types of annuities — fixed, indexed, and variable. In a fixed annuity, the insurance company agrees to pay you no less than a specified rate of interest during the time that your account is growing. The insurance company also agrees that the periodic payments will be a specified amount per dollar in your account. These periodic payments may last for a definite period, such as 20 years, or an indefinite period, such as your lifetime or the lifetime of you and your spouse.

In an indexed annuity, the insurance company credits you with a return that is based on changes in an index, such as the S&P 500 Composite Stock Price Index. Indexed annuity contracts also provide that the contract value will be no less than a specified minimum, regardless of index performance.

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What Is a Federal Annuity?

Definition of Annuity

The term “annuity” refers to a long-term financial instrument designed for retirement savings. Many annuities have tax advantages. The contributions are often tax-free.

People invest in annuities mainly to save for retirement. Investors can buy annuities from a financial institution, usually an insurance company. The annuity allows the investor to contribute money and then receive a stream of payments at a later date. Annuity payments can be fixed or variable depending on the preference of the investor.

Federal Annuities

A federal annuity is a part of an employer-sponsored retirement plan. The structures differ slightly for employees in the CSRS (Civil Service Retirement System) or the FERS (Federal Employees Retirement System). In either case, federal employees contribute to their annuity while employed by the government, and the money is typically matched by the agency. The money accumulates over time and then is paid back to the employee after retirement each month for the rest of that employee’s life.

How a Federal Annuity Works

When an employee retires from the federal government, he begins to receive annuity payments. This is very similar to receiving payments from a pension plan. The employee receives stable payments that are calculated based on years of service and average pay. Federal annuities are not available to the general public as investment vehicles.

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Federal annuities, variable annuities, fixed annuities, indexed annuities, and structured annuities. It’s important to know the variances and how the subtle differences can have not so subtle impacts on your financial position. The viewpoints above provide an easy to understand explanation of just what structured annuities are and how they differ from other forms of annuities.


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