Back to structured settlements. As a reminder, these are regular compensations given to people who are awarded large amounts of cash, usually from a civil suit or a claim.
- Yearly Payments: Payments are divided into equal amounts and distributed for the duration of the agreed-upon period.
- Inflation Hedging: Payments are made in inflation hedging can fluctuate over time, depending on inflation or deflation in the economy.
- Monthly Indexed Installments: Payments that can change in amount due to some financial index that is tracked over time.
- Differed Payments: Payments are paid in unequal amounts over a fixed period of time in order to cover expected expenses over the contract period.
- Measures for the Future Care of the Recipient: Payments are made to cover such things as periodic medical or housing expense that may vary from period to period.
Annuity Payment Pros
The advantage of receiving annuity payments is the tax benefit. Many structured settlements are not taxable, or may significantly reduce a person's taxes as compared to a lump-sum distribution. Even those structured settlements that are deemed taxable can provide tax benefits. Income taxes can be deferred to the period in which the payment is made, as opposed to paying the lump-sum tax in the period in which the award is made.
This is the reason lottery winners are given a choice between receiving their winnings as an annuity or in entirety. In some cases (usually in the case of minors or people deemed unfit to manage their own finances), a lump sum is not awarded by design.
Annuity Payment Cons
Once the arrangements of distribution in a structured settlement are made, they cannot be changed. Depending on the legal structure of the settlement, the beneficiary may or may not use a structured settlement as collateral for a loan or another investment option. This is especially true if the payments are not taxable, since federal law prohibits the encumbrance of these tax-free benefits.
Take my money,