Annuity
Definition
An annuity is a financial product that provides periodic payments over time in exchange for an upfront lump sum investment. In personal injury settlements, annuities are the mechanism used to fund structured settlements—arrangements where you receive compensation through scheduled payments over months, years, or even a lifetime rather than as a single lump sum. Insurance companies purchase annuities from highly-rated insurance carriers to guarantee these future payments.
How It’s Used in Personal Injury Cases
Structured settlement annuities are sometimes proposed in personal injury cases, particularly when the settlement is substantial or the injured person has long-term needs. The defendant or their insurer purchases an annuity that will make specified payments to you according to an agreed schedule. Common structures include an upfront payment plus monthly payments for a guaranteed period, lump sum payments at five or ten-year intervals, or monthly payments for life. The payments from structured settlement annuities are generally tax-free, unlike interest earned on invested lump sum settlements.
Practical Example
After a serious trucking accident that leaves you with permanent injuries and the inability to work, you negotiate a $500,000 settlement. Rather than taking the entire amount as a lump sum, you agree to a structured settlement: $100,000 upfront (from which your attorney’s fees and medical liens are paid), monthly payments of $2,000 for life to replace your lost income, and a $50,000 lump sum payment every five years for major expenses. An insurance company purchases an annuity to fund these guaranteed payments, providing you with reliable income for the rest of your life.
Why It Matters to Your Case
Annuity-funded structured settlements offer both advantages and disadvantages. Benefits include tax-free payments, guaranteed income that cannot be quickly spent, and security against poor financial decisions or predatory advisors. Drawbacks include lack of flexibility—once established, structured settlements typically cannot be changed even if your needs change. You also face risk if the annuity company fails, though major carriers are generally stable. Attorney’s fees must be calculated on the present value of the annuity, not the total future payout. Before accepting any structured settlement, ensure you understand exactly when you will receive payments, that the annuity carrier is highly rated, and that the arrangement meets your actual financial needs.
Key Takeaway
An annuity is the financial product that funds structured settlement payments over time. While structured settlements offer tax advantages and guaranteed income, they sacrifice flexibility, making it essential to carefully evaluate whether this arrangement meets your individual needs.