The Ultimate Glossary of Annuity Definitions

annuity settlement

Understanding exactly what an annuity is certainly isn’t easy, and if you’re thinking about selling your annuity or selling your structured settlement, then you might be feeling just a bit overwhelmed. To help you out, here are just a few important terms and phrases you’ll need to know about annuities:

  • Annuity: This is a financial agreement between an individual and an insurance company where the individual purchases an annuity for a certain amount of money, and the company ensures that a certain amount will be paid back to the individual either all at once or throughout a payment period (usually lasting 25 years).
  • Deferred Annuity: An annuity that begins only after the final premium has been paid. As of 2013, there were around 34.8 million individual deferred annuities in place.
  • Immediate Annuity: This is pretty straightforward; you can buy an immediate annuity by “investing” a lump sum of money into the insurance company and then begin receiving payments immediately.
  • Fixed Annuity: The company agrees to pay back a specific amount of money to the individual within a certain number of payments.
  • Variable Annuity: This is a riskier type of annuity, and generally isn’t recommended for anyone who doesn’t have other secured funds. With a variable annuity, your payments could vary depending on the current market value of your investment.
  • Annuity Settlement: This is an annuity that you receive if you’re given financial compensation in a personal injury settlement agreement. Annuity settlements are often preferable over lump sums in an accident case, especially if you don’t have experience managing a lot of money. In fact, it’s estimated that 25-30% of settlement lump sum recipients use up their funds within two months.
  • Lottery Annuity: If you win the lottery, you have two choices of your payment method: either receive a lottery lump sum payout all at once, or receive annuity payments (usually over the course of 30 years).
  • Annuity Contract: An annuity contract is your agreement with the insurance company that outlines the terms of your annuity. It will state all of the details of your payments and payment schedule. If you break your contract and take your payments early or take larger payments than what your contract outlines, you’ll have to pay a fee.
  • Cash Surrender Value: This refers to the amount of money that you’ll receive if you break your annuity contract early. In most cases, you’ll be hit with some pretty high penalties for breaking your contract, so your cash surrender value will be much lower than what your total annuity amount is.
  • Guaranteed Payments: With some annuity agreements, you can ensure that if you die before receiving all of your payments, another specified recipient can continue receiving those payments in your stead.
  • Lifetime Payments: This ensures that you’ll continue to receive payments for your entire life. The downside, as many people have discovered, is that a lifetime payments agreement could mean you won’t receive as much money in each payment.
  • Tax Deferral: This means you can hold off paying taxes on a specified amount of money, and it’s a benefit of getting an annuity. Unlike investing money in other assets, you don’t have to pay taxes on any money which you’ve invested into an annuity. You will, however, have to pay income taxes on the payments you receive because they are technically considered part of your income once you have control over them.

The fact is, selling your annuity settlement can be one of the best decisions for your financial future — and there’s no reason to keep yourself from selling your annuity payments just because you aren’t sure what all the terminology means!

The Financial and Legal Terms of Settlements and Annuities

annuity settlement

Understanding annuity settlements and structured settlement payments isn’t exactly the easiest thing in the world, but if you want to sell your annuity or settlement then you’ll be dealing with some confusing — but important — legal terms. Here’s just a brief outline of some of the most common words and phrases that you’ll hear when you’re dealing with an annuity settlement or with structured settlement payments:

Adjusted Gross Income: A person’s total annual income which is used to calculate how much money is owed to the federal government in taxes. Your AGI calculation includes annuity and settlement payments because these funds are considered “income” — in other words, you have to pay taxes on this money when you receive it.

Annuity (or Annuity Settlement): A sum of money which is invested in an insurance company and then paid back to the recipient over a predetermined length of time and/or in predetermined amounts. Annuities are usually paid out over the course of 25 years or until death.

Alternative Dispute Resolution (ADR): Any way of working out a legal disagreement without going to court. Many divorces and personal injury lawsuits are conducted through negotiation and/or mediation outside of the courtroom in order to reach a settlement without wasting time or money on a lawsuit.

Bench Trial: Any legal case which is presented before a judge without a jury present.

Beneficiary: The specified recipient of an annuity or a structured settlement.

Compensatory Damages: This refers to financial compensation for any physical or psychological injury, loss, or damage done to a person as a result of another person’s intended actions or unintended negligence.

Down Payment: A partial payment which must be paid upon receiving an item or service, while the remaining debt can be paid back (usually with interest) over a period of time. Purchasing a house in the U.S., for example, costs an average $272,900 and most people need a loan agreement (or mortgage) to cover the long-term payments. The downpayment for a mortgage agreement is usually 5%, 10%, or 20% of that total amount.

Inflation: The increase of the price of goods and services over time. You’ll most often hear this used in the phrase “adjusting for inflation” — and if you’re dealing with an annuity, you’ll know that annuity payments don’t typically adjust for inflation.

Lump Sum Payment: A sum of money, either from a settlement or an annuity, which is paid all at once instead of over a period of time.

Structured Settlement: A court-ordered agreement of settling a lawsuit, which includes a compensation package of financial compensatory damages paid to the plaintiff (injured party). This can be paid out in a lump sum of cash or in an annuity agreement over a period of time.

Selling a Structured Settlement or Annuity Settlement: This process allows the beneficiary to transfer (or “sell”) their payments to another person or organization and receive a specified lump sum of cash in return. It is a legal process and it does not involve breaking an annuity or settlement payment contract.

Of course, this is just the beginning of the complicated terminology you might encounter if you’re getting into (or getting out of) an annuity or structured settlement. Hopefully, though, it will help you get organized so that you can make wise decisions with your finances!

A Quick Guide to Minors and Structured Settlements

structured settlement payment

It’s common for kids to end up with structured settlements when they’re involved in a lawsuit as a minor — in fact, you might be surprised just how common it is for a minor under the age of 18 to end up with a large settlement. This happens often because courts try to provide as much financial stability as possible over a long period of time; after all, growing up isn’t cheap! The average cost of one year’s tuition at a state college is $9,139, and the average adult owes $3,761 in revolving credit at any given time.

Annuity settlements are protected so that minors can’t access their funds before turning 18, and these settlements are arranged so that periodic payments will be made on a regular basis. In most cases, the settlements are a result of a serious personal injury that the child sustained — and courts know that it’s important to do this, because most claimants (90%) who receive a large settlement all at once end up spending all of it within five years.

The legal restrictions in place for annuity settlements do make sense and they do protect the money so that minors — or their parents/guardians — don’t become part of that 90% and spend the money too quickly.

The one thing is, minors don’t have very much control over how their settlement is organized even after they turn 18 and start receiving payments. In other words, the structured settlement payments are organized according to how their parents, guardians, and/or legal representatives see fit. Even when the minor is legally able to start receiving his/her settlement, there’s very little flexibility or room to change the terms of the settlement.

For this reason, many people choose to sell structured settlement payments. Whether they need to buy a new car, go to college, pay off medical bills to reduce debt, or anything else that requires a large sum of money, selling these structured settlement payments in return for a lump sum of cash can be a very wise decision — once the person is old enough to make the decision and to invest that money smartly, of course.

Selling Your Annuity Settlement: How You Can Prepare

annuity settlementIf you currently own a structured settlement or an annuity settlement, you’ve probably already figured out that there are a lot of rules and “fine print” restrictions that keep you from spending your money when you want to. Whether you’re interested in paying off your debt or you’d like to start up a business on your own, you may have already found that the small payments you receive through your settlement isn’t enough to really do anything with.

For this reason, you might be thinking about selling your structured settlement or annuity settlement in order to receive a lump sum of cash upfront — and that can be a really good decision in many cases.

Here are a few tips to keep in mind as you look to sell your structured settlements:

  • Keep in mind that you’ll want to sell your settlement payments to a buyer who gives you the most amount of money in return — but you won’t be receiving the entire settlement no matter which buyer you choose. There are some necessary fees involved in the process, so be sure to keep this in the back of your mind.
  • It’s not necessary to figure out exactly how you want to spend your money once you receive it, but if you don’t have a specific reason for selling your payments, then consider investing your cash. This might involve traditional stock market investments, or it could mean investing in a new business (which costs around $30,000 to start up), purchasing a new home (which costs an average of $272,900), or going back to school for your degree (which can cost over $31,000 at a private college).
  • Before getting your funds, also consider talking with a financial adviser about how to spend and/or invest your money. Many people make mistakes after selling their settlement payments simply because they’ve never had the experience managing so much money before — and this is pretty simple to avoid if you’ve got some help!

Regardless of why you want to sell your annuity settlement, preparation and organization are key for a great experience!