Annuities are insurance contracts which are frequently used to fund structured settlements. The primary parties to an annuity include:
1. Owner – The owner is entity or person who purchases the annuity. Ownership of an annuity generally includes the rights to: designate and change the payee and/or beneficiary; assign the annuity; pledge the annuity as collateral; and, if the policy permits, to commute remaining payments to a lump sum. Note: however, recent legislation authorizing factoring impacts these ownership rights in the context of a structured settlement.
2. Annuitant – The annuitant is the “measuring” life for lifetime annuities under which payments continue for the annuitant’s lifetime. Payments under some lifetime annuities (“life only”) terminate when the annuitant dies. Other lifetime annuities (life and period certain) provide a certain number of payments regardless of when the annuitant dies. When an annuitant’s life expectancy is reduced by injury or illness, life companies assign a “rated age” which results in either a lower cost or greater monthly benefits. Some annuities (“certain only”) end at a specified date and do not include a lifetime feature.
3. Payee – The payee is the person designated by the owner to receive annuity payments and may be either the annuitant or some other person or entity including a trustee or a bank account.
4. Beneficiary – The beneficiary is the person designated by the owner to receive any remaining payments following the death of the annuitant. Beneficiaries are also referred to as “contingent payees”.
Annuities provide many structured settlement design options including: immediate or deferred payments; monthly or annual payments; lifetime or period certain payments; level or increasing payments; fixed or variable payments. Most structured settlement annuities are fixed as opposed to variable. Unlike fixed annuities, variable annuities are considered an investment security.
Two alternative financing methods exist for annuities to fund structured settlements. Both methods are intended to provide income-tax free periodic payments for the claimant pursuant to IRC Section 104 (a). Under the first method (“annuity financing”), the defendant (or its liability insurer) provides the claimant with an unfounded, unsecured promise to pay money in the future. The defendant purchases and owns the annuity which provides funding to meet its obligation. Under the second method (“qualified assignment”), the claimant and the defendant (and/or its liability insurer) agree to transfer the periodic payment obligation to third party with a qualified assignment pursuant to IRC Section 130. Each alternative financing method requires compliance with statutory requirements and also produces separate and distinct contractual rights and duties for the participants.
Structured settlement annuities represent a permissible funding alternative for special needs trusts, medicare set-aside arrangements and 468B settlement funds.
For additional information, see "Structured Settlement Definition" and “Advantages and Disadvantages of Annuities” as well as “Structured Settlements and Periodic Payment Judgments”.
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