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    Rachel Christian

    Rachel Christian

    Financial Writer and Certified Educator in Personal Finance

    Rachel Christian is a writer and researcher focusing on important, complex topics surrounding finance and investments. She is a Certified Educator in Personal Finance with FinCert, a division of the Institute for Financial Literacy, and a member of the Association for Financial Counseling & Planning Education (AFCPE).

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    Emily Miller
    Emily Miller, Managing Editor for Annuity.org

    Emily Miller

    Managing Editor

    Managing editor Emily Miller is an award-winning journalist with more than 10 years of experience as a researcher, writer and editor. Throughout her professional career, Emily has covered education, government, health care, crime and breaking news for media organizations in Florida, Washington, D.C. and Texas. She joined the Annuity.org team in 2016.

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  • Financially Reviewed By
    Thomas J. Brock, CFA®, CPA
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    Thomas J. Brock, CFA®, CPA

    Investment, Corporate Finance and Accounting Expert

    Thomas Brock, CFA®, CPA, is a financial professional with over 20 years of experience in investments, corporate finance and accounting. He currently oversees the investment operation for a $4 billion super-regional insurance carrier.

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  • Updated: May 13, 2023
  • 6 min read time
  • This page features 11 Cited Research Articles
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Annuity.org partners with outside experts to ensure we are providing accurate financial content.

These reviewers are industry leaders and professional writers who regularly contribute to reputable publications such as the Wall Street Journal and The New York Times.

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Annuity.org has been providing reliable, accurate financial information to consumers since 2013. We adhere to ethical journalism practices, including presenting honest, unbiased information that follows Associated Press style guidelines and reporting facts from reliable, attributed sources. Our objective is to deliver the most comprehensive explanation of annuities, structured settlements and financial literacy topics using plain, straightforward language.

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We partner with CBC Settlement Funding, a market leader with over 15 years of experience in the settlement purchasing space. Our relationship with CBC allows us to facilitate the purchase of annuities and structured settlements from consumers who are looking to get a lump sum of cash immediately for their stream of monthly payments. When we produce legitimate inquiries, we get compensated, in turn, making Annuity.org stronger for our audience. Readers are in no way obligated to use our partners’ services to access Annuity.org resources for free.

CBC and Annuity.org share a common goal of educating consumers and helping them make the best possible decision with their money. CBC is a Better Business Bureau-accredited company with an A+ rating and a member of the National Association of Settlement Purchasers (NASP), a national trade association that promotes fair, competitive and transparent standards across the secondary market. Additionally, Annuity.org operates independently of its partners and has complete editorial control over the information we publish.

Our vision is to provide users with the highest quality information possible about their financial options and empower them to make informed decisions based on their unique needs.

Is a Structured Settlement an Annuity?

Structured settlements and annuities share a unique connection.

While most structured settlements are annuities, not all annuities are structured settlements.

Learning how structured settlements work is essential to understanding their link to annuities.

What Are Structured Settlements?

Structured settlements result from legal cases, usually personal injury or wrongful death cases.

A plaintiff (the person wronged) who receives money from the defendant (the person or company accused of wrongdoing) can choose to receive compensation via a single lump sum or a structured settlement.

A structured settlement disperses money from a lawsuit gradually over time to act as a safety net and provide long-term financial security to the injured party.

The concept is simple: Someone who receives a huge windfall of cash may run through the money quickly, leaving them dependent on government assistance. But with a structured settlement, the payments are stretched over a longer period.

Settlement payments can be designed to provide money for medical care and other needs. Cost of living adjustments can be factored in as well.

Did You Know?

Structured settlements are funded by annuities and all structured settlement brokers are regulated by state insurance commissions. Structured settlement consultants must also comply with at least seven sections of the U.S. tax code.

Structured settlements most often take the form of a fixed annuity. Lawyers for the defendant and the plaintiff work with a trained consultant to flush out details of the settlement, including the size and frequency of payments.

Instead of paying you directly, the defendant sends the settlement money to a life insurance company’s subsidiary, called an assignment company.

The assignment company then buys the annuity from its parent insurance company. The assignment company holds the policy and pays you every month, every quarter or every year — depending on the terms of your contract.

Annuities are customizable contracts that offer timed payouts, guarantees on principal and protection from market fluctuations.

To encourage the use of structured settlements, the Periodic Payment Settlement Act of 1982 made annuity payouts from a structured settlement tax-free. This means you won’t pay any federal, state or local income tax on payments. Interest and dividend taxes don’t apply either.

What Are Annuities?

Annuities can be used in situations other than structured settlements.

Someone who hits the lottery or wins big at a casino may choose to receive their payout through an annuity instead of as a single lump sum.

Like the plaintiff in a personal injury case, lottery and casino winners who opt for periodic payments often do so to ensure the influx of cash lasts for many years.

Annuities can also be purchased by individuals who want to guarantee a steady stream of income for retirement or other purposes.

In this situation, the buyer uses their own money to fund the annuity and can customize the payout and other details to meet their financial needs.

This is why not all annuities are structured settlements. Annuities can be used for other purposes, too.

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Why are you selling your annuity or structured settlement payment(s)?

Select all that apply

Step 3

Who owns the annuity or structured settlement?

Differences Between Annuities and Structured Settlements

Perhaps the biggest difference between structured settlements and annuities is the process of selling them.

If you purchased an annuity with your own money, you may want to cash out early. In most cases, you’ll owe fees and penalties for doing so.

You’ll also face a 10 percent tax penalty if you withdraw money from a retirement annuity before the age of 59 1/2.

Selling structured settlement payments is a different story.

Because structured settlements are meant to earmark money for an injured party’s future, strict state and federal laws govern the sale of payments to third parties known as factoring companies.

Factoring companies purchase future structured settlement payments in exchange for cash now.

To sell a structured settlement, you’ll need to appear before a judge and make a valid case for why you need immediate access to your settlement money. You may be required to have a lawyer present at the hearing.

Selling traditional annuity payments, in contrast, isn’t a legal process.

Differences Between Structured Settlements and Annuities

  • Structured settlements are awarded to plaintiffs in court cases. Annuities can be purchased by individuals.
  • Annuity sales don’t require court approval if you purchased or inherited the annuity.
  • It’s often faster to sell annuity payments than structured settlement payments.
  • You may be able to withdraw a small portion of your retirement annuity penalty-free. Structured settlement contracts offer little if any flexibility once finalized.
  • The sale of personal injury structured settlement payments is not taxable. However, selling other annuity contracts comes with tax consequences.

You won’t receive the full value of your structured settlement when you sell payments.

Each factoring company applies a discount rate that reduces the amount of cash you receive. Discount rates can range from 9 percent to 18 percent and higher.

An effective discount rate includes this amount plus other costs, such as legal and court fees, commissions to brokers and miscellaneous processing fees.

Because selling structured settlement payments is a legal process, it usually takes longer than selling other annuity payments.

Taxation is also different for selling structured settlement payments versus annuity payments.

The sale of personal injury settlement payments is not taxable. However, if you sell your entire deferred retirement annuity contract, you’ll owe income taxes on all the earnings higher than your original investment.

Examples of Structured Settlements and Annuities

To better illustrate the similarities and differences between structured settlements and annuities, here are a few examples.

These examples are for educational purposes only.

Examples of Structured Settlements

Wrongful Death Case Involving a Minor
When Zachary Jones was 12 years old, he was involved in an automobile accident that killed his mother and left Zachary disabled. His father, Jeffery, filed a wrongful death claim in county court on behalf of Zachary and himself. Jeffrey received a lump sum settlement. Because Zachary was a minor, the court approved a structured settlement for Zachary worth $2.5 million to provide him with monthly payments once he turned 18.
Personal Injury Case
When Jenna Smith was a child, she was exposed to lead paint in her Baltimore apartment. When she was 18, her family brought a lawsuit against the landlord. The court found Jenna had suffered irreversible brain damage from lead paint exposure. The family won the case and received a $575,000 settlement from the landlord. Due to Jenna’s mental disability, her family chose to create a structured settlement for Jenna to give her roughly $950 a month over the next 35 years. The contract was customized to include a 2 percent payment increase each year.

Examples of Annuities

Purchase of an Immediate Annuity
Bob Ayala is 60 years old and decides to purchase an immediate annuity from an insurance company. He gives the insurer a lump sum payment of $200,000. In return, the company converts that money into an ongoing, guaranteed stream of income for the rest of Bob’s life. He’ll start receiving monthly payments from the insurance company within a year.
Annuity Payments from Lottery Winnings
Sara Stewart just won a $1.53 billion jackpot in the lottery. She must decide between taking the lump sum or setting up an annuity that would pay out her earnings each year for the next 30 years. Taking the lump sum would give Sara about $553 million after taxes. On the other hand, Sara would receive about $32 million a year from the annuity, or a total of $856 million over 30 years. Sara is worried about spending her winnings too quickly, so she opts for the fixed annuity option funded by the lottery company.

As you can see, annuities and structured settlements may function similarly, but they are used in different situations for different purposes.

Selling structured settlement or annuity payments is a serious decision with many factors to consider. It’s wise to speak with a financial advisor or an attorney to explore your options before selling.

Please seek the advice of a qualified professional before making financial decisions.
Last Modified: May 13, 2023