The Settlement Alliance

What is the Difference Between an Annuity and a Structured Settlement?

What is the Difference Between an Annuity and a Structured Settlement?

Feb 21, 2017

Do you hear the terms “annuity” and “structured settlement” and think they are interchangeable? You’re not alone. Because they both pay out income over a period of time, along with some other overlapping qualities, it can be easy to confuse the two. However, there are also distinct differences that separate the two types of financial products. Here is a breakdown of each type:

What are the Characteristics of an Annuity?

An annuity is a type of financial tool that provides for repayment of a premium after a specific time period has elapsed, and for a guaranteed amount of time. It is usually arranged via a contract between an individual and an organization (e.g. an investment firm or insurance carrier).

Annuities can serve as a part of a well-balanced investment portfolio. They typically offer conservative returns, but the guaranteed payments provide the investor with a predictable source of future income.

Common characteristics of annuities may include some or all of the following, depending on the annuity product:

  • Periodic guaranteed payments made to the beneficiary until death
  • Superannuation (allows an individual to not outlive their income)
  • Commercially available investments
  • Tax-deferred growth without the necessity of being part of a larger entity, such as a retirement plan or an IRA
  • Taxes not payable until the funds are withdrawn; only the growth is taxable, not the principal
  • Guarantee against loss of principal
  • Very high limit or no limit on non-deductible contributions

While an annuity can serve as a valuable financial tool, there is a certain type of annuity that provides additional tax benefits—but it is only available to individuals who meet certain criteria.

What are the Characteristics of a Structured Settlement?

The key difference that sets a structured settlement annuity apart from other types of annuities is its tax-free nature. Structured settlements are not available to all investors, though—they are reserved for claimants who receive settlements in personal injury, workers’ compensation, and wrongful death suits.

A structured settlement is funded using all or a portion of the settlement proceeds, which are then distributed back to the claimant in a series of periodic payments. In addition to the tax benefits offered by a structured settlement, it also provides the claimant with a stable, reliable source of future income—peace of mind that is appreciated by those who have been injured.

  • Both the settlement proceeds and any growth are 100% income tax free
  • Guaranteed payments can be made monthly, quarterly, semi-annually, or annually
  • Payments may be made in different increments to supplement expense needs (e.g. large initial payment, increase over time, decrease over time, etc.)
  • No overhead fees or administration costs
  • Guaranteed rate of return

It is important to note that if a claimant does want to use a structured settlement annuity, that decision must be made prior to finalizing their settlement. Certain language allowing for the structured settlement annuity has to be included in the settlement agreement.

Contact us today

For more information regarding annuities, contact our team at 800-464-2500 or info@settlement-alliance.com today.

Disclaimer: The Settlement Alliance does not provide legal or tax advice.

We are proud to partner with the highest rated structured settlement providers in the industry:

  • American general Life Companies
  • Berkshire Hathaway Structured Settlements
  • Liberty Life Assurance Company of Boston
  • MetLife
  • Mutual of Omaha
  • New York Life
  • Pacific Life
  • Prudential