To fully understand how a structured settlement annuity works, you need to dig a little deeper into the technical and legal aspects of what an annuity is for. Annuities are designed to be a method to plan your retirement, estate, life insurance needs and also for structured settlements resulting from lawsuits.
The annuity is tax free money for you and most times they can be set up for payments that can last for a lifetime, even if beyond the guaranteed payments date. For the most part, an annuity is just an agreement between you and an insurance company who will make the payments to you.
There are 2 types of qualities that every annuity has that you need to understand a little better. You can have an annuity that has fixed or variable qualities. A fixed annuity will make set payments based on income generated from government bonds or securities. The variable annuity will make payments that can fluctuate depending upon the current rate of the investment. The variable annuity could be sometime similar to a money market account where the interest rate can fluctuate.
There are also 2 payment types to consider with your annuity. You can have an instant payment option or a deferred option. The instant payments, of course, will begin immediately. The deferred payments will begin at a predestined time or at specific times, such as when the person reaches a certain age, or at the age of the annuity.
With the two different options for both the annuity type and payment type, you could have 4 different options for you to begin setting up your annuity. The most common of these 4 types are the fixed annuity with immediate payments and the deferred payments with a variable annuity. The fixed annuity with immediate payments is the more secure of the two with guaranteed monthly payments of a set amount. The variable type is more risky and is based largely upon the stock market.
One of the largest benefits of the structured settlement annuity is the tax deferred or tax exempt status of the payments. Depending upon how exactly it is structured, you can earn your monthly payments with no taxes being due. This is like receiving more money than your actually getting because you are not paying taxes on the income.
The tax exempt status of the annuity was created with the IRS regulations in 26 U.S.C. 104(a)(2). This law was created to allow accident victims to collect money tax free that is collected from a settlement or judgment that arose from an accident which resulted in bodily injury or other impairments. It was done in order to encourage structured settlements to protect the money that a person can receive instead of getting a lump sum payment that could be blown and spent without consideration of future expenses.
The structured settlement annuity is a great way to have a monthly income that is set for a number of years. You can also transfer or sell your structured annuity payments to other companies for lump sum payments or arrange for a new structure to be set in place.