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!