Annuity Settlement Explained
The same with the structure settlement, this annuity settlement has been designed in order to pay out stream of money to certain individual within a prolonged period of time. The structure settlements are in fact garnered through purchasing two or more annuities. Therefore, the more the annuities are, the more the structured settlement is.
Annuity settlement has been originally designed in order to help people in securing their fix and constant cash flow when retirement years come. This annuity settlement can be enjoyed by individuals in the form of a large sum of money coming from the lawsuit or from lottery winning into stream of payments. The annuitant will receive the pay-out for span of months, years and even decades. On the contrary, those individuals who are waiting for this annuity might consider this as a burden rather than as a benefit for them.
Annuity settlement may come in various forms and annuity might also begin within a short period of time or in other cases, the payments can be delayed until the later life of the annuitant. There are also instances that an annuity is structured so that the annuitant will be paid within the course of their lifetime. This also sometimes appears as a fixed annuity that is set in order to pay not only the annuitant but also the spouse with certain amount of years despite how long the annuitant had lived.
These annuities are simply the insurance contract purchased by certain individual called as contract owner, which will pay the annuitant or the individuals who receive the annuity. Annuity is the periodic amount that started within certain time and until the life of the annuitant. Usually, the annuitant and contract owner are just the same person. Though most annuities are only designed for retirement however the pay outs can start anytime. Accumulation period is the period of time wherein money is being paid into the account and annuity period is the period wherein the annuitant has received the amount. Once the annuity period starts and at the same time the account has also started to the pay the annuitant, the account is now annuitized. Such periodic payment is usually determined based on the amount inside the account, the amount earned during the life of annuitant and the years in which the annuitant is expected to live and enjoy his life.
Types of Annuity Settlement
Fixed annuity guarantees specific payment that starts within specified date and continues every pay period that can be monthly, semi-annually, and quarterly or annually. Compared to other investments, the benefit of this fixed annuity is that, such payments are guaranteed within the life of the contract owner or annuitant.
Without knowing how long certain people will live, do you think insurance company can guarantee payments? This is done through spreading risks over lots of individuals. The fixed annuity payment is considered dependent on the life span of the individual when payment starts. There are some that lives longer and go beyond what has been expected while some die earlier. Once the annuitant died earlier than the expected year, the insurance company will now keep the remaining principal, which in turn helps in paying for those who lived longer.
Fixed annuity also guarantees principal and the payments will not be less than the overall paid premiums decreased by other surrender charges or expenses. From 1-3 years, annuitant is guaranteed with specific interest rate and afterwards, the insurance provider will now provide another definite interest rate within certain period of time. There are some annuity contracts that come along with bailout provision which enables the policy owner to dismiss such contract without any surrender charges most especially if the latest interest rate is lower compared to the previous rate by certain amount like 2% less. So, in order to deter the policyholders from stopping the contract earlier, the annuity contract should assess surrender charge, which might begin higher than 10% however declines in the following years. With this, if the owner is still maintaining the policy for longer years, surrender charge will no longer be assessed especially if the policy is already cancelled, which in turn enables the insurance provider to invest such premiums on a long-term investment so that they will be able to earn higher rate.
Variable annuity comes with variable pay-out which is depending upon the investment portfolio’s profitability in which annuity is based. And this can be used as a hedge from inflation. On the other hand, the investment options are limited only on what has been offered by the insurance provider, either selected mutual funds or proprietary funds. This variable annuity is quite similar with the tax-deferred mutual fund. And the same with the mutual funds, it has a charge of 8.5% in the maximum sales and it also goes along with letter of intent, breakpoints as well as rights of accumulation. As for the premiums garnered from this variable annuity, it is all placed in an account and separated from the insurance company’s general account since such account is being managed and handled more aggressively for attendant risk and more income.
The variable annuities can be considered as an investment risk due to the fact that the pay-out is then dependent upon the specific portfolio and SEC or Securities and Exchange Commission has classified this annuity as securities. If in case the account is not performing well based on the expected one, the annuitant either receives less payments than before or none at all.
Though it is a fact that annuitant can really get benefits from their annuities however there are instances that the time you spent from waiting your annuity payment provides more hassle than the benefit it could provide, which in turn creates a burden on the annuity holder since they don’t have any choice but to wait for the annuity payments within the pre-determined instalment dates. With these kinds of circumstances, there are companies that understand how annoying it is to wait for the annuity, and so, they are offering a help.