Annuity vs. Lump Sum. Find info on annuities and lump sum payments used in structured settlements. Pros and cons of each, definition, and how they relate to structured settlements. Define:annuity and Define:lump sum.
One of the increasing popular modes of accepting payment from a judgment is through a structured settlement annuity. This differs from receiving a lump sum payment. With a lump sum payment, the defendant (the person or company that owes you money) gives you the entire amount up front. You then use the money to pay fees and other expenses that incurred as a result of the injury.
In comparison, with a structured settlement annuity, the money from the judgment is used to purchase an annuity. This annuity pays you in installments; instead of getting everything all at once, you get it spread out over years – or even over the rest of your life. Often, the insurance company that the annuity is purchased through pays the attorney fees and medical expenses associated with the judgment, and then a fixed amount is set on for your installments. You can usually choose monthly, quarterly or yearly payments.
There are advantages and disadvantages to both the structured settlement annuity vs the lump sum payment. It is important to review your individual situation, and consult with a trusted attorney and/or tax professional before making your decision.
Structured settlement annuity: pros and cons
The structured settlement annuity can be of great benefit to many people. There are pros and cons. Carefully consider your options before making a final choice.
Pros of the structured settlement annuity
A structured settlement annuity offers the stability of a regular income. You receive the same amount each payment, for as long as the annuity is in effect (this can be for a set time, or specified for the rest of your life). You can, pretty much, count on payments regularly, and plan your budget accordingly.
Structured settlement annuity payments also come with tax benefits. Your income from such an annuity is not taxed. The investments that help the annuity grow are usually tax free, and this means that your recovery can actually grow in total. You could end up with more money when you go with a structured settlement annuity compared to choosing a lump sum payment.
There is also a measure of flexibility. You can choose to have the medical expenses and attorney fees paid up front, and then have the remainder spread out over the next years. You can also set up an annuity to pay you a little now, but increase the payments down the road. If you are concerned about inflation, you can structure the annuity settlement to increase incrementally as inflation takes its effects. It is also possible to arrange for the payments to be made to beneficiaries after you die.
Cons of the structured settlement annuity
There are downsides to a structured settlement annuity, though. The main downside is that once you agree to an annuity, it is set in stone. You can't change the agreement once you have signed it. This means that you can't switch things around to take a lump sum later, and you can't change the payment schedule or amounts any time down the road.
Another risk that you take with the structured settlement annuity vs a lump sum option is that the company making the payments may fold. This means that you may not get the unpaid amount of money that is owed to you. Also, there are implications involving public benefits paid by the government (like Medicare) that may be restricted if your money is placed in a custodial account.
Lump sum: pros and cons
With the lump sum, you get all your money up front. For some people, that works out very well. However, it is important to consider more than just the large amount of money that is involved.
Pros of the lump sum
The biggest pro of the lump sum payment is that you get all of the money up front. Additionally, the lump sum payment is tax free – you don't have to pay income tax on it. After you've paid fees and expenses, you then usually have enough money left over to buy something nice, pay off debt or go on vacation. Others choose to invest the money and live off the returns.
Another advantage is that since you have all of the money up front, you do not have to worry that the payment company will fail you. You have the money in hand, and there is no question as to whether a balance will end up unpaid.
Cons of the lump sum
in comparison, one of the main cons of the lump sum payment is that you do have to pay money on returns you earn through investments. The tax implications mean that even if you do put the money into an investment that yields a return, you have to pay income taxes on that money – and it could bump you up into a higher tax bracket in some cases.
Another con is the desire to spend all the money at once. While many people have the savvy and self control to make a lump sum payment work, others spend the money quickly, and are left with very little in the end.
Ultimately, it is up to you to decide what will work best for your circumstance. Consider the pros and cons of a structured settlement annuity vs. a lump sum payment, and then make a decision based on what would be best for you.