Insurance products which provide long-term income through a stream of future payments are refer to as Annuities and structured settlements. While structured settlements are used for personal-injury cases, wrongful death claims or lottery payouts, investment annuities can be used to save money for retirement and beneficiaries.
So how does an annuity work?
Retirement money are preserved by annuity, allowing your nest egg to grow with a long-term, tax-deferred savings, then later providing you with a future stream of income payments. However, you may decide to sell payments and access funds early if life interrupts your financial plan later,
Types of Annuities
We have different types of annuities which are available in the market. These annuities types vary in payout, merit, conditions, and other factors that will be considered. They are briefly discussed below:
This single premium annuity is always purchased with a lump sum of money and guarantees instant income. The largest segment of single premium or immediate annuity buyers are People who are approaching retirement period.
Another annuity type is the deferred annuity. There is always delays payments during the accumulation stage, where your asset grow tax-deferred; and distributes payments in the income phase as a lump-sum payout, through an annuitization or periodic payments or.
Lottery annuity is a type of structured settlement that rather than paying the winning recipient a lump sum of money disburses payment to its owner over a particular period of years.
The Pensions annuity method involves paying the retiree a fixed, periodic amount based on salary and time of service with the employer prior to the retirement period.
This is a type of annuity often created as a result of a lawsuit; in this case defendant and plaintiff negotiate the
future medical and family needs of an injured party, and once an agreement is reached, the defendant funds the structured settlement with periodic payments through a third party, usually a life insurance company. Some of the structured settlements allow for a partial lump-sum payment.
What are the Reasons for Structured Settlements?
- Damages that are awarded from a workers’ compensation case
- Money awarded for a claim from wrongful death.
- Money awarded from a personal injury, lawsuit or insurance settlement.
- Winning a state lottery.
Merits and Demerits of Annuities
There are merits and demerits of annuities. Annuities can have a lot of merits when put in the right edge. Every individual should be aware of all their available benefits, as well as their risks and drawbacks that are involved.
- It allows income for life, especially useful if you outlive your other available assets.
- It also allows safe investments generally backed by established insurance companies.
- There is guaranteed against loss by taking risk out of your hands and transferring it to insurance company.
- It also allows your money to grow tax-deferred.
- Result to your money been locked in for a particular period of time.
- There are complex financial instruments with expensive fees, commissions and administrative charges involved.
- Relinquish the lump-sum payment option when you buy an immediate annuity or annuitize your deferred annuity contract.
- One needs to surrender charges and IRS penalties applied when withdrawing funds before 59? age