This guest post is from Melissa Rudd, who was a financial consultant for many years. Now retired, she enjoys sharing her know-how with others by posting online.
You’ve recently won a lawsuit, the lotto, or maybe you’ve just retired. You’ve been offered a lump sum payment, but you don’t really know how to manage money yourself. You’ve always left it up to someone else. Fortunately, you can almost always ask for a structured settlement. It will take the stress off of you having to watch your new-found money like a hawk so you can enjoy life.
It’s All About Annuities
At their core, structured settlements involve annuities. Annuities are insurance contracts that convert a lump sum of money to regular monthly payments. All annuities are managed by life insurance companies. Basically, this is how it works: the insurer receives money from your employer, the government, or someone else that owes you money. The insurer then converts this lump sum into guaranteed monthly payments.
Part of the payment consists of the original principal amount and part of it is interest that the insurer adds to the payment. Typically, the interest portion is very small. In countries with income taxes assessed on interest from insurance proceeds, this is sometimes referred to as “the exclusion ratio,” since principal sums of money are not taxed when paid while interest gains are.
How To Decide Whether A Structured Settlement Is Right For You
There are a few things to keep in mind when you need cash now and are considering a structured settlement:
- What will the payout be?
- What are the terms of the settlement?
- Will I need a lump sum of cash in the future?
- What are the death benefit options?
The payout and death benefit options are probably the most important factors in a structured settlement. If the proceeds are coming from a life insurance policy or a retirement account, making sure your spouse continues to receive income after you’re gone might be one of your top priorities. In fact, every pension plan (which is a type of structured settlement) contains special provisions for spouses.
The terms of the settlement vary and depend on the issuing insurance company. Some structured settlements go on for your entire life. Other settlement options only pay for a specific number of years. If you have the option of choosing your terms, choose the payment option that you think suits your own needs. You might need the help of a financial planner for this.
For example, let’s say you need money for retirement. Should you choose a 10-year structured settlement or should you take lifetime payments? This is where a financial planner can help out – analyzing your other retirement income and determining whether or not you need the lifetime payments.
Finally, making sure you do not need a lump sum of cash for the future is important. Why? Because when a structured settlement is finalized, you cannot get the money back. In other words, once the lump sum is converted to monthly payments, that’s it. All you can get is monthly payments. You won’t have access to the lump sum anymore.
Do Your Due Diligence
When you accept a structured settlement, it’s almost impossible to back out of it. There is one way, though. You can sell your annuity to a third-party financing company. That company will then pay you a lump sum for your payments. The lump sum is less than the total amount you would receive from all of the payments under the structured settlement.
The benefit is that you get the cash that you need right now. When transferring annuity payments to a financing company, you’ll need the services of a lawyer, and annuitants usually have to prove to a court that selling the annuity will improve the person’s life. In other words, if you sold your structured settlement, you would have to prove that it would improve your life.