The Pros and Cons of Structured Settlement Annuities
Some insurance companies are promoting what is called a “structured-settlement annuity,” but potential claimants may want to look closely at it.
With a structured-settlement annuity, an injured person receives a monthly payment from an insurance company as compensation for damages. Often the party entitled to these payments wants the cash now and sells his or her rights to someone else.
It works this way:
You decide you want cash now. A so-called “factoring” company buys the right to receive your future annuity payments for a lump sum. A judge approves an order for you to receive the cash and orders the issuing insurance company to assign the future payments to the buyer.
Generally, the payouts are higher than with traditional fixed annuities.
But the buyer may face risks: A recent decision ruled that the factoring company, which had purchased an income stream from a personal-injury claimant, had no right to it because the claimant had already sold the same settlement to another factoring firm.
There are concerns for the seller as well: As this form of a settlement was developed to provide for an injured person who may have ongoing needs, some states and perhaps even the federal government might stop the sale.
A traditional fixed annuity may be a safer option. With these annuities, you convert a lump sum into a pension-like stream of income that will be provided by the insurance company for a specified period or for life.
Discuss both options with your financial advisor before making a decision.
How to Postpone Annuity Payments for Years
More and more insurance companies are introducing a new type of deferred annuity that allows you to boost potential income by postponing payments for several years.
As is the case with an immediate annuity, these new policies allow you to convert a lump sum of your cash into an income stream that is paid by the issuing insurance company over a specified period or for life. An immediate annuity, however, can start issuing payments almost instantaneously; with these new deferred annuities you are offered the opportunity to select a start date for your payments that could vary from one to 40 or more years.
The advantage is that when payments do begin, they tend to be larger than with an immediate fixed annuity. Take the following example from Northwestern Mutual Life Insurance – one of many companies offering deferred annuities: A 55-year-old man who pays $250,000 for an immediate fixed annuity can get about $14,000 a year for life. But with a deferred income annuity that starts issuing payments at age 65, he will receive $22,000.
Of course there are downsides, as there are with all investments. For example, as with other fixed annuities, the insurance company keeps your money if you die before the payments begin (unless you’re able to purchase a more expensive option that ensures your heirs will receive a lump sum or series of payments after your death).
Also, people who purchase these policies lock in a smaller income when interest rates are relatively low, as they are in today’s economic environment. But with an increase in inflation, the purchasing power of the annuity declines.
A deferred annuity may be right for some, but it may not be a good option for you. It’s always a good idea to discuss your individual financial circumstances with your advisor before making a decision.