How a structured settlement annuity works
A Structured Settlement is essentially an agreement under which an insurance company agrees to pay an individual a predetermined amount of cash for a fixed length of time if the individual meets an accident. The documents generated in a structured settlement include an agreement, a qualified assignment, an annuity application, a court order if a claim is made by a minor, and an annuity policy.
Payments for a structured settlement annuity can be made for the duration of the life of the claimant. The amount paid can comprise of equal installments, installments of varying amounts, and lump sums. The payments from a Structured Settlement Annuity are free from income-tax and are guaranteed by contract. Since a structured settlement annuity is meant for long-term financial security, it is important to get an assurance of the credentials of the annuity provider.
The periodicity of payment is entered into the settlement agreement. Factors that individuals can consider in deciding upon the date of commencement of payment, duration, and periodicity include monthly expenses, present age, extent of hazard in occupation, and retirement plans. In order to ensure that the payments remain tax-free, the structure of payments should not be altered once it has been agreed upon by both parties. In the case of a qualified assignment, the insurance company making the payment can transfer its obligation for payments to a third party.
There are issues that one should understand before opting for a structured settlement agreement. If payments are made to an estate, they are free from income tax but subject to estate tax. Purchasing a structured annuity can affect the availability of ready money with an individual.
State and federal laws govern the closing of a structured settlement. The closing process usually gets completed in 3-6 months. Federal laws stipulate that a court order be obtained by either the customer or the funding company that is purchasing the payment stream so that there are no tax liabilities. The manner in which the court order is obtained is regulated by various “Structured Settlement Protection Acts”, which are in force in 36 states in the United States.
A disclosure statement is made available to a customer 3 to 14 days before he receives the transfer agreement. The disclosure statement mentions the amounts to be paid to the customer and their due dates; the IRS Discounted Present Value of the amount at that given point in time; the Gross Advance Amount and the Annual Discount Rate; disclosures desired by the state; and a list of the fees and commissions incurred.
It is advisable to avail attorney advice before going in for a. In fact, in some states, it is a precondition to acquiring a structured settlement annuity. However, depending upon the laws being used for the transaction, customers do have the option of waiving legal representation in the Transfer Agreement or obtain an Estoppel letter from their attorney.
The funding company commences payment to an individual after acknowledging the assignment and receiving a court order. The payments start 30-45 days after the receipt of the court order.
When you're getting monthly payments but need some cash now, selling some or all of those future payments might be the way to go.
Why might you want to sell annuity payments? After all, by getting a guaranteed payment spread over several years or even the rest of your lifetime, is a good foundation for financial security.
Most people in fact are more used to getting regular periodic payments, in the form of a paycheck. We use the monthly amount to meet our monthly commitments like living expenses, mortgage payments and so on. Others receive monthly checks for social security, or other government benefits. Relatively few of us have large amounts of money to invest and protect at any one time.
Looking at this another way, many people are not used to receiving large sums of money all at once, as may happen with an injury claim or a lottery win. If we accept the full amount up front, the money could be gone quickly unless its managed properly.
That's why annuity payments often make sense. They are like salary...paid regularly and in fairly modest amounts although it adds up over time. We are generally able to use those smaller payments wisely, and not spend money before we have it.
If receiving annuity payments makes so much sense, then why would you then want to sell those annuity payments...especially if you can only sell them for a discounted amount?
Consider what's best under the circumstances
Now that you have an annuity in place and receive monthly payments, you may have compelling reasons to need cash now. You may not have had much choice than to accept a structured settlement payout and now you want to explore other options.
Even if you have managed your money wisely, you might have financial obligations that can only be met by cash now. For example, you might want to prepay your high interest mortgage. Or you might have accumulated credit card debt while you have been recovering from physical injuries you suffered (and meeting your living expenses while not working). This has a high interest rate, and you can save a lot of money by paying it off early. Or your family needs a different home, and you can get a better deal on it with cash today. There are nearly as many reasons for needing to sell annuity payments as there are people with annuities. Whatever the reasons, you need to look at your own situation carefully to decide whether its a good idea for you.
How to Sell Your Annuity Payments
Many times you are not actually selling your annuity. Instead, you are selling the right to receive payments under that annuity. You would factor the annuity policy payments via a court order.
The annuity settlement agreement often contain provisions that prohibit selling the annuity payments. These provisions could give you the impression that you cannot sell it.
By selling your right to receive a stream of future payments, you can accelerate the payout.
You need to know that due to the tax implications of annuity payments, state law now regulates selling settlement annuity payments, sometimes called factoring. You need court permission to sell that stream of payments. The court would consider whether the sale is in the best interests of the annuitant, before permitting (or rejecting) the sale application.
Where to Sell Annuity Payments
You would look for a buyer of annuity payments, to cash out of your annuity. The buyer can help review your situation to present a case that the sale is in your best interests. For example, it may be better to sell only part of your remaining annuity payments - just enough to meet your current need. By presenting a specific proposal to meet a genuine need, the court is more likely to approve the sale transaction.
This is a fairly complex legal process, and you should always get legal and tax counsel before deciding to proceed with an annuity sale.
