What Is An Annuity?
According to the SEC, if you were to go tomorrow to an insurance firm and sign an investment contract with them, you’d be buying an annuity. An annuity, which is very similar to a certificate of deposit (CD), is a contract, where you give an insurance firm a large sum of money only to have said sum accumulate interest, which could be variable or fixed, over time. Afterwards, you can collect the deposited money plus the interest in numerous ways. For example, you could take the money as one large paycheck, or you could receive periodic payments that can act as income.
Annuities are classified according to how the money grows inside of them. There are three main types: fixed, variable, and indexed.
What is a structured settlement annuity?
A structured settlement is where the defendant agrees to pay the plaintiff fixed sums of money over a period of time instead of one large lump sum. Sound familiar? Courts tend to recommend this arrangement, particularly when a minor is involved.
Due to their flexibility, Annuities serve as an excellent conduit for structured settlements. In the case of a structured settlement annuity, the defendant purchases an annuity in the name of the plaintiff from the plaintiff’s insurance firm. Afterwards, the insurance firm starts paying the plaintiff according to the agreed upon terms.
An excellent infographic that summarizes the entire process can be found here.
Why resort to structured settlement annuities?
Structured settlement annuities offer several benefits:
- The structured settlement annuity is tax-free. Moreover, any growth inside the annuity is tax deferred.
- A structure settlement annuity requires no maintenance fees.
- Most annuities can keep growing, irrespective of the market, which is an important hedge against risk for dependents on this annuity. Furthermore, an annuity can be designed so that it grows when the market is growing but doesn’t shrink when the market is tumbling.
- An annuity’s payment structure can be tweaked as desired. Although the annuity will pay fixed sums of money over a period of time, the payments can increase in size so as to coincide with inflation or important life mile stones, such as purchasing a car.
Why are structured settlement annuities perfect for minors?
Whenever minors are involved in a legal proceeding, the court tries to take into account the long- term stability of said minors. Consequently, a court has to ensure that a minor has enough reserve money for both necessary long-term needs, like food, lodging, and so on, as well as any medical necessities. This requires some financial planning. Structured settlement annuities are a perfect vehicle for that.
Benefits of a structured settlement annuity for minors:
- With a structured settlement annuity, the court controls what the money is used for till the minor comes of age. This arrangement is to protect minors from dishonest or fiscally irresponsible guardians.
- Thanks to the court’s involvement in how the money is spent, the minor is assured of receiving a sizeable sum of money upon reaching adulthood.
- The money will grow regardless of what happens in the market.
- The minor is protected from himself/ herself; the minor is unable to spend all the money at once.
- All this financial planning guarantees that the money will offer a safety net for the minor until he/ she is able to fend off for themselves.
- A settlement plan that makes use of the flexibility of annuities can aid the minor in the critical junctures of his/ her life later down the road, which could include going to college, buying a house, or starting a family.`