What is an Annuity?
An annuity is a payment that comes at designated intervals for a specified period of time.
There are several different ways to end up receiving payments from an annuity. The most common types of annuities are those sold by insurance companies, and these can come in several varieties. Other common ways to receive an annuity are through receiving pension benefits from an employer, being awarded a structured settlement from a lawsuit, and winning the lottery.
Annuities offer a steady stream of income, and the purchase of an annuity is a popular investment to secure retirement income. However, because there are so many different types of annuities, each with their own set of rules and regulations, it is important to educate yourself on the potential risks and benefits of investing in an annuity, or selling an annuity you already own. Follow the links below to become an educated consumer.
Immediate versus Deferred Annuities
An Immediate annuity is basically an insurance policy that guarantees the policyholder, referred to as the annuitant, will receive a series of payments. The term immediate refers to the fact that once the contract is established, payments will begin almost immediately. This is in contrast to a deferred annuity, in which payments do not begin until a pre-established date. Immediate and deferred annuities serve slightly different functions. Basically, with a deferred annuity, there is a set amount of time in which your investment is allowed to grow before you begin to receive payments.
Qualified versus non-Qualified
To understand the intricacies of some of the advantages of Annuities, we need to make a distinction between qualified and non-qualified annuities. When people refer to different investments they will commonly refer to the funds as non-qualified or qualified. These terms relate to whether or not the funds used to pay the premium have income taxes taken out. With a retirement plan/IRA, employers deduct an allowable portion of pre-tax wages from the employees, and the contributions and earnings then grow tax-deferred until withdrawal. This would be a Qualified plan. Non-Qualified plans are those that are not eligible for tax-deferral benefits. As a consequence, deducted contributions for non-qualified plans are taxed when income is recognized.
Structured Settlement Factoring Transactions
Structured settlement factoring transactions are the sales of future structured settlement payments.
Based on the fact that it is common for people to have a need for larger sums of money, the sale of structured settlements has become a popular way for recipients to sell part or all of their structured settlement in exchange for a lump sum payment. Because the circumstances in one’s life may change and unanticipated needs may arise, the structured settlement that once provided financial security and a designated stream of income no longer meets the needs of the recipient. Structured settlement factoring transactions are a solution to the problem that is posed by the inflexibility of structured settlements.
In 2001, Congress passed H.R.2884 which created regulations for the structured settlement factoring transaction industry. This legislation was put in place to protect consumers that wanted to sell their structured settlement payments by requiring the purchaser to pay an exorbitant excise tax when assuming control over another’s structured settlement. Essentially, this created a large financial barrier which forced sellers of structured settlements to follow the legislation. This tax can be avoided if the sale of the structured settlement is approved by a state court order. To address this legislation, many states enacted statutes regulating structured settlement transfers in accord with this mandate. You can review your state’s mandate on our statutes page.
Although the particular provisions vary from state to state, generally the requirements that must be met are as follows:
Inform
The seller of the contract must be informed about the essential details of the transaction.
Give Notice
- All interested parties must receive notice of the transfer.
Get Advice
Receive notice to seek professional advice regarding the transaction
Get approved
Receive Court approval of the transaction.
The court’s approval of the transaction is generally based on whether they find the transaction to be in the best interest of the seller.
The best interest of the seller is generally a subjective ruling by the court that takes into account the overall circumstance of the seller. Factors that may contribute to this judgment are current means of support for one’s self and one’s dependants, as well as mental and physical capacity, and the need for future medical treatment. Some states also require the seller to disclose the purpose for their desire to seek a lump sum payment in exchange for their structured settlement. You can review examples of “best interest” affidavits in our transactions examples.