What are the benefits of a structured settlement?
- Tax-Free Income: All income from a structured settlement annuity is completely tax-free to the recipient. The benefit of tax-free income is paramount. Virtually no other financial product can match it.
- Guaranteed Income for Life: If a life annuity is used, income is guaranteed for the life of the claimant. An annuity is unique in that it is the only financial product that will generate guaranteed income for the lifetime of an individual.
- Avoidance of Financial Risk: Income from a structured settlement annuity is guaranteed. The claimant shifts the investment burden to the life insurance company that issued the annuity contract. The life insurance company’s contract guarantees all income with its full faith and substance.
- No Management or Investment Fees: Alternative investment plans often have significant fees, including: advisor fees, investment management fees, legal fees, and accounting fees. Fees can reduce returns on alternative investment plans by 2% to 5% per year.
- This aspect alone places an annuity in a totally different category from any other financial plan.
- Financial security of highly rated life insurance companies: Payments are guaranteed by life insurance companies rated at least A+ by A.M. Best, Aa3 by Moody’s and AA- by Standard & Poor’s and Fitch.
What rate of return can be expected from a structured settlement annuity?
The internal rate of return provided by a structured settlement annuity will depend upon market interest rates at the time of purchase. However, it will always be competitive compared to the rate of return of other fixed income investments.
In fact, because a structured settlement provides tax-free income, the equivalent taxable yield (i.e., the yield that a taxable investment must achieve in order to produce the same after-tax rate of return) is almost always very superior, very often considerably so - especially considering there is no investment risk to the claimant. In order for an alternate investment to produce the same after-tax returns, the claimant almost certainly would have to accept significant investment risks.
What are the tax consequences of a structured settlement?
Payments from a structured settlement are received income tax-free (federal, state, and local) pursuant to Internal Revenue Code Section 104(a)(2) and as outlined in Code Section 130. Congress enacted these provisions to encourage and facilitate the use of structured settlements to help protect injured parties.