Personal injury annuities allow plaintiffs to recover their losses over a set period of time which can offer a number of benefits. When a settlement offer is made, the individual’s personal injury lawyer will explain the terms of the settlement and the annuity. This can help the individual with long-term financial planning and make it easier to manage the settlement funds. Annuities are popular and it is estimated that more than $6 billion in new structured settlements are generated each year.
How Annuities Work
Annuities are similar to insurance products that guarantee that a series of regular payments will be made for a set term. This term can extend for as long as the individual’s natural life. In fact, the conditions for annuity payments are highly flexible and it’s possible to include provisions that will pay beneficiary’s after the principal’s death, allow for balloon payments, etc. The conditions of an annuity payment can be negotiated by the plaintiff’s personal injury lawyer which makes it possible to tailor the terms, conditions, etc. to best meet the plaintiff’s needs.
Many structured settlements include provisions for an initial lump sum and a final lump sum. This makes it possible to address any outstanding medical bills and attorney’s fees right away while often creating a boost at the end of the annuity term. This can be useful if the funds are going to be put towards things like college tuition, retirement, etc. It is also possible to insert provisions for periodic lump sums so that recipients can pay for things such as upgrading medical aides, undergoing planned surgical procedures, paying off mortgages at a planned date, etc.
Advantages of an Annuity
Annuities can offer many advantages for plaintiffs. They can help recipients avoid higher taxes. While personal injury settlements aren’t generally taxable, any funds received for lost wages or punitive damages are taxable. Annuities can also make it easier for individuals to manage large sums of money. This is important especially on larger settlements where it can be tempting to “splurge” on purchases rather than save funds for anticipated medical expenses.
Annuities can also ensure that the company required to pay the settlement has the funds to make the payment. If paying in a lump sum will bankrupt the company or exceeds its current ability to pay, annuities provide an option that can help guarantee the funds will be paid in full by the end of the annuity period.
Disadvantages of an Annuity
If the plaintiff controls too much of the settlement process, the government can cancel tax benefits which means he or she could end up with a sizable tax bill that was not expected.
It’s also possible the company will go out of business. If the insurer holding the annuity goes bankrupt, plaintiffs are still entitled to recover the money they are owed. However, this can mean delayed payments or no payments if there are not enough funds to cover the debts owed to all creditors.
Payments may also diminish over time. Because economic conditions are constantly in flux, many companies insist on language that allows them to reduce payments when certain economic triggers occur.
There are also fees associated with annuity payments. These add up with each payment and can nibble away at the principle very quickly. Thus, it’s important for individuals to carefully go over and understand all the fees associated with the offer.
Further, over time the purchasing power of the annuity will diminish. For example, $1 million received and invested wisely today can cover the rising costs of healthcare and inflation. Conversely, since plaintiffs can receive funds for decades into the future, the $1 million awarded today will likely be worth less over time. While annuities earn interest, it is not usually enough to cover the cost of inflation. One option that can help offset inflation and rising healthcare costs is to set the annuity up for increasing payments.
Annuities Should be Considered Carefully
Annuities can be a good option for some settlements. The key is to find the right balance which is something that an individual’s personal injury lawyer can help create.
In some cases, hiring a financial manager is a better option than a long-term annuity payment. While an annuity provides long-term payments on a regular schedule, a financial manager can create the same type of payment schedule with a lump sum payment. The difference is there are fewer fees attached and the individual can conservatively invest the funds so that the money received today is available to cover costs incurred tomorrow and well into the future.