Those with structured settlements can take advantage of immediate annuities. An annuity is a regular monthly payment from an insurance company for a personal injury claim. An annuity may be paid in small installments over the annuity owner’s life.
By accepting a guaranteed schedule of payments, a claimant give up the right to lump sum payments once they start receiving an annuity. Many people later decide they want to sell their annuity for cash, meaning you have the option to purchase an immediate annuity. You can buy immediate annuities from different funding sources, such as a CD or IRA account.
An annuity provides guaranteed payments over the lifetime of one person, which ends upon the annuitant’s death. A single life annuity offers a way of ensuring you will not outlive your financial resources. This annuity offers the highest payout of any lifetime annuity as there are small risks for the insurer. The price of a life annuity is the average life expectancy of the recipient.
While the insurance company uses life expectancy for pricing immediate annuities, you come out ahead if you outlive their expectations. The insurance company is required to keep making payments on your immediate annuity regardless.
One of the main advantages with immediate annuities is security. An immediate annuity provides stable lifetime income. Simplicity is another advantage as the annuity purchaser does not have to manage investments, watch markets, or report interests or dividends.
Immediate annuities also yield high returns. Interest rates that insurance companies use to calculate immediate annuity income are typically higher than CD or treasury rates. Since part of the principal is returned with each payment, this also means your receive greater amounts from an immediate annuity than from interest alone.
There are also preferred tax opportunities to postpone paying taxes on some of the earnings from immediate annuities. Another advantage of an immediate annuity is safety of principal as funds are guaranteed by the insurer and aren’t subject to financial market fluctuations.
An immediate annuity may be qualified or non-qualified. A qualified immediate annuity refers to the tax status of the funding source used to purchase the annuity. If the funds had qualified for IRS exemption from income taxes, then the entire payment received each month for a qualified annuity is taxable. Examples of funding may be corporate-sponsored retirement plans or lump sum distributions from pension plans.
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