Now, you can take the traditional immediate annuity route and cash the checks every month for the rest of your life, or you can do something a bit fancier.  For instance, what about your spouse?  Children?  How will they be taken care of if you croak early?  After all, the decision to annuitize is usually permanent, as is your choice of annuity settlement option.  That’s why it’s vital to carefully consider all your annuity options upfront.

Please note, this article only discusses fixed annuities, not variable annuities.  To get a rough idea of how much income different options might yield, check out immediateannuities.com and tinker.

Annuity Settlement Options

Lifetime Annuity

This is the standard, your grandfather’s annuity and probably one of the most popular annuity settlement options. You fork over a lump sum and the insurance company writes you a check every day for as long as you live . When you die, that’s it.  Your heirs and spouse get nothing.  These types of annuities come both in inflation-indexed and non-inflation-indexed flavors.  Naturally, you’ll pay for the privilege of being protected from inflation, but it’s a price well worth paying in my opinion.  This is by far the most cost-effective annuity settlement option, at least from the standpoint of the purchaser.  The lack of survivor benefits is a problem for many people, however.  Which leads us to…

Joint Survivorship Annuity

With a joint survivorship annuity, payments will continue until both you and your spouse die, ensuring whoever survives longest isn’t left out in the cold.  Naturally, these types of annuities tend to pay out longer than simple lifetime annuities and so will pay a lower monthly income for a given lump sum than you would otherwise receive; however, the resulting peace of mind is worth it for many retirees.  This is probably the annuity settlement option I would choose.

Life Annuity Period Certain Annuity

This type of annuity is designed to make sure your heirs receive something should you die early.  For instance, say you take out a $200,000 annuity and die in a car accident the next year.  Your heirs would be out $200,000, which would be fine except you didn’t get nearly $200,000 worth of payments before you died.  To hedge against this, you might consider a life annuity period certain contract whereby payments are guaranteed to continue for a certain period of time (usually 10 or 20 years) regardless of how long you live.  In the above example, your heirs would continue receiving monthly checks after your death for as long as the contract specified.  Naturally, you’ll receive a lower monthly payout in exchange for this benefit.  And not to worry: you will of course continue receiving income for life even if you live beyond the specified period.  These terms are very attractive to many investors; however, it’s usually not worth it.  A more cost-effective strategy would be to only annuitize enough of your nest egg to cover your fixed monthly expenses and invest in the rest in a low-cost, diversified mutual fund portfolio.

Period Certain

Period Certain annuities are not particularly popular.  Instead of receiving an income for life, you’ll only receive it for a specific period of time (perhaps 5, 10, or 20 years).  Once the period is up, the payments stop regardless of whether or not you are still alive and kicking.  Period certain annuities aren’t really appropriate for retirees, but they might make sense if you have some fixed expense that will end at some specific future date (college maybe?).  To be honest, I don’t really see the appeal here, but there’s a market for it so somebody must.

However, before you decide whether structured settlement funding is right for you, there are a number of factors you should consider. Here are three reasons to think twice about selling your settlement and three reasons to feel good about selling.

Reasons to Think Twice

1) The most obvious reason to hold onto your structured settlement is because you usually get less money in the long run if you sell. Not only can the company that buys your settlement take a hefty cut, but you also have to weigh the expense of retaining your own legal advisor to make sure you get a fair shake in the process.

2) One of the reasons its good to have a lawyer look over the documents when you think about selling your settlement is to avoid tax consequences down the line. If you’re dealing with an unscrupulous company, you could end up paying excise tax penalties that dramatically increase your losses.

3) Seller beware: another way unsuspecting folks who sell their settlements sometimes get tricked is interest drag. This is when the buyer prolongs the purchase of the settlement to earn interest off the delayed time. Six to eight weeks is a normal amount of time for the transaction depending on which state you live in and depending on the cooperation of your insurance company. Some upstanding structured settlement buyers actually credit you the per diem interest you lose while the sale is being finalized.

Reasons to Sell

1) A common reason people sell their settlements is because they need the money to pay off their debt or for some other emergency like family medical expenses. In these cases, selling the settlements is a matter of necessity.

2) For many people, the most compelling reason to sell your settlement is to put that money to more profitable use. For example, you may use it to purchase a property whose rental payments exceed the disbursements you were receiving.

3) Another reason to sell your settlement is if there is an opportunity that requires the funding up front to take advantage of it. Some examples include starting a business or going back to school. While these activities might not reap large rewards initially, they can be savvy investments in your future that make structured settlement funding worth the expense.

If you’re on the fence about selling the entirety of your settlement, you might make a compromise; most companies allow you to sell only a portion of your future payments.

There are many reasons many prefer to deal with structured settlements through a third party.  Companies paying out a settlement may want to avoid paying taxes on settlements for lost wages, so they would rather deal with tax-free personal injury payments.  They can also protect those who are inexperienced with finances such as minors and people who are incompetent.  Furthermore, those receiving payments may still be eligible for Medicaid benefits.  Companies may also prefer to deal with lump sum benefits that allow the receiver to pay off debts.  In addition, the purchaser of the settlement can sell it later.

Before one purchases a structured settlement, he or she needs to be certain, he or she is dealing with a reputable broker.  There are federal and state regulations and restrictions in these types of dealings, so the broker needs to know the law and follow it to the letter.  One way to be assured of finding an honest broker is to look for one affiliated with the National Structured Settlements Trade Association.

A purchaser of structured settlements should shop around to find several quotes from several brokers.  This way there is competition for a deal, so there is a better chance at getting good rates.  In addition, it is necessary to have an attorney experienced in the field to look over the contracts or any other paperwork that may or may not have fine print.  Furthermore, one ought to discuss the process with others who have already had these dealings in the past.  Tips from an experienced purchaser can save one lots of trouble in the near and distant future if the purchaser is reliable.

A purchaser should be aware of all aspects of the settlement game.  He or she should consider all risks involved in this particular type of investment and get sound advice from those already experienced in this field.  One must also know who can be trusted in this field and have a good attorney on his or her side.  If done properly, this venture can be a worthwhile investment.

In this turbulent economy, many Americans are struggling to keep up with living expenses.  With the rate of unemployment at an all time high and home values at an all time low, it can be difficult for investors to find a way to weather the storm.  Receiving cash for annuities has been the answer for several annuity owners with no other financial means to support themselves.  While this immediate cash may be necessary to live comfortably, many receiving the cash are failing to properly plan in order for it to last.  It is essential for annuity owners choosing this option of funding to plan properly to avoid finding themselves in the same position just a few years down the line.

When choosing to cash out your annuity payments for a lump sum of money, it is important to plan investing a portion of the lump sum payment for protect yourself against financial difficulties in the future.  While you may have an immediate need for money, the entire amount of funds from the annuity sale should not be spent and should be managed properly in order to protect yourself and your family from unforeseen hardships or need.  The lack of proper planning and protection is perhaps the largest cause of bankruptcy and insolvency in America today.

If you have been active in investing, it may be a good idea to sell your annuity with strategic investment strategies in mind.  Never gamble with your money and choose a strategy you have actively participated in and from which a steady stream of income can be earned.  Whether you are cashing out your annuity for the immediate availability of funds, or to fund a new investment plan, make an educated decision you will not regret in the future.

Annuity buyouts and the companies or attorneys that promote them have become very popular in recent years.  In essence, these groups or companies will purchase the remaining payments of an annuity in exchange for a lump sum to the person currently receiving compensation.  While this is possible in many areas, it is not uncommon for the terms of an annuity to prohibit its sale or borrowing against future payments.  Two thirds of states have enacted laws to discourage this type of transaction and if an annuity has a qualified tax status, it cannot be sold, borrowed against or otherwise traded for other forms of compensation.

In areas where this type of transaction is legal, there are requirements of your annuity.  The contract must have a non-qualified tax status, which means that it cannot be privy to certain tax privileges, or be tax exempt.  The annuity can also not be of the variable type and the contract must be valid in a state that allows the sale of annuity payments.  If your annuity does not meet one or more of these basic requirements, it can usually not be sold.

Individuals sell annuity payments for a variety of reasons.  Whether the annuity was inherited or granted to an original payee in a court of law, payments may have been logical in the beginning yet circumstances change over time.  People use lump sum buyouts to pay for school, pay off debt, buy a home, start a business or anything else they need the money for. Annuity buyout companies as well as attorneys usually give free consultations about what your options are if you are legally allowed to sell off future payments.  Although selling these payments can bring more useful lump sums of cash, it is important to remember that businesses that will buy an annuity are in business to make a profit.  Carefully review any agreement to make sure selling is the best option for your particular situation.

What Is A Structured Settlement?

Plaintiffs settle cases every day in civil court and in these cases large sums of money are paid as damages for some type of tort or civil wrong.  This money is often paid in a structured form beginning with some type of down payment to cover court costs and immediate expenses however; the rest is put into an annuity and paid out over a long period of time based on what the parties in a trial agree to.  This is done for a few different reasons.  One could be that a plaintiff wants to minimize or eliminate tax liability, which can be done through this method.  Another reason is to protect the plaintiff’s funds from numerous outside pressures to use the money.  In essence, a settlement is structured to protect the plaintiff from quickly depleting monies that may be meant for medical bills and the inability to work.

What Is A Structured Settlement Loan?

While plans can accurately be made to distribute large sums of money, circumstances can change over time for an individual and the original payment plan may no longer fit their needs.  At this point, receivers of a structured settlement have a couple different options.  The best way to see if you can get a lump sum of cash for your annuity or settlement is to speak with an attorney.  About two thirds of all states have enacted laws that discourage borrowing against annuity payments or selling annuities, which is the same thing.  Annuities with tax advantages or that are exempt from taxes are restricted from being sold or borrowed against.  Annuity holders may be able to find a company to buy the future payments or lend money against the account assuming the terms of the contract and state law allow it.  Individuals should tread with caution however because a company willing to buy you out of your annuity is trying to turn a profit so it may or may not be a good deal depending on your specific circumstances.

Structured settlements are in place mainly for the good of a plaintiff in a case so that awards are maximized for the benefit of the receiver and are not squandered.  If you currently have a structured settlement and are receiving payments, looking into your options cannot hurt however, there is good chance that taking payments may be your only option.

It is important to take into consideration all potential outcomes of post retirement years when making a decision such as this.  Many pensions from companies and governments stop paying after the beneficiary or their spouse dies leaving no money for heirs.  This phenomenon can be magnified if individuals should die shortly after retirement with only the chance to draw a handful of checks.  On the other side of the coin, if retirees accept a lump sum payment from their 401k or pension plan, the chance always exists they could outlive their savings.  Cashing out a pension all at once will mean you have to be sure that it will last 25 or 35 years (or longer).

Another important consideration is your expenses while you are retired as well as other resources that you may have available.  Many retirees can draw on social security; however, these payments are typically not enough to cover even half of a persons expenses such as housing, food, entertainment, etc.  While social security payments are adjusted for inflation meaning they can maintain their buying power over time, the checks are generally not enough.  In this case, annuity payments may be a better choice.  IRA balances are not adjusted for inflation and the value of your money is dependent on market conditions.  Taking a lump sum and experiencing a serious market downturn sometime after retirement could put finances in a bind.

All of the retirement options discussed above are good choices only when they fit into future goals for an individual.  It is impossible to plan for every possible contingency and even the most well laid plans and carefully calculated decisions turn out to be wrong.  Taking things like health, lifestyle, life expectancy, future market conditions and plans for after you are gone from this world should all be weighed and considered when making the choice of a lump sum versus annuity.  Using multiple sources of income such as social security, 401K’s, as well as retirement income funds you may have built up can help hedge the risk of either running out of money before death or not having anything to leave to future heirs.

If you are currently receiving payments, it is a bit more complicated than going to a lawyer and saying, “I want to sell my annuity payments.”  Assuming you live in a state where this is legal, you must have an annuity that is not tax qualified meaning your original contract cannot have provisions exempting payments from certain income taxes or other tax benefits.  Your annuity can also not be of the variable type and of course, you must live in a region where the sale of such contracts is not banned by law.

When Not To Sell?

If you are lucky enough to be able to sell your annuity, there are important considerations before doing so.  After selling annuity payment and receiving a lump sum, you are now in control of the money management aspect of your finances, which is what the annuity was previously in place for.  Even a huge sum of money can quickly be depleted when mismanaged.  If you are trying to sell payments in order to get money to buy something frivolous like a car or other non-essential purchases, it is best not to sell.

Additionally, you shouldn’t sell annuity payments if you don’t really need the money.  Buyers out there are not your friends;  rather, they are in this business to turn a profit.  In other words, you’re going to have to sell at a discount.  Unless you have a knack for trading stock options or penny stocks (and you almost certainly do not), it’s usually in your best interests not to sell.

When To Sell?

Some very good reasons to sell your annuity payments would be to pay for college for yourself or a family member, paying off debt, buying or putting a down payment on a home  Annuity arrangements are used for the exact purpose of protecting those receiving the money from premature depletion of a significant lump sum and should not be circumvented lightly.

Once you do decide to sell annuity payments, an attorney is sometimes the best person to contact if you already have a specific buyer in mind.  While you will still have to pay for services rendered, an attorney is charging hourly and may have no interest in the amount you will be receiving.  Alternatively, there are plenty of structured settlement companies out there; however, many of them are not exactly reputable.  Tread carefully.

These types of payment plans, also called structured settlement investments, involve a payee being compensated over a long period of time rather than a single lump sum.  One of the main reasons that settlements are structured this way to provide for ongoing financial support and to protect the payee from depleting the entire balance of the amount owed prematurely.  This is more prevalent in court proceedings where an individual may have recurring medical bills to pay for, ongoing living expenses when unable to work from an injury, or just to protect the settlement in general from being squandered (many trusts are set up this way).  Most state lotteries, for example, default to this type of structured settlement payment plan unless specifically opted out of.  The reasons for this are probably two-fold:  first, budgets might be broken if these entities were forced to pay out winnings immediately and second, lottery winners have a history of squandering their winnings.  Better to dole out the winnings little by little than ruin somebody’s life with a huge lump sum.

A structured settlement investment can sometimes be sold; however, there are numerous states that ban the sale of future payments or borrowing against a structured settlement.  If a particular settlement contract has exclusion clauses or has certain tax benefits, it is quite likely that it cannot be sold.  There is however, some regions of the U.S. that still allow these types of transactions if an annuity or settlement fits certain criteria.

While the prospect of converting a structured settlement income stream into a lump sum may seem enticing, it’s probably in your best interests to avoid doing so if at all possible.  If some unexpected emergency crops up (a medical emergency, for instance), you may have no choice.  But structured settlement companies are in business to make money, and that means buying your structured settlement at a discount.  Unless you are sure you can invest the lump sum well enough to earn a sizable annual return (hint, you probably can’t), you should hold onto your annuity.

Those of you lucky enough to have won the lottery or a large legal settlement would do wise to consider all the options carefully before taking any non-reversible action.  Remember, representatives of would-be structured settlement purchasers are not your friends.  They aren’t looking after your best interest;  rather, they are just trying to make a buck.  Don’t let your guard down.

Starting Annuity Investing Too Soon

This happens too frequently with investors who are more interested in actually getting their hands dirty in their retirement planning to think about starting with a plan. Too many investors just jump in with both feet, without considering all possible routes and avenues your retirement portfolio may take on the long road to retirement. You may have as many as 40 years before you retire…and things can surely change in that time.

Although some company’s annuity rates might be tempting, be careful to note the annuities surrender charge before signing the papers. Surrender charges are nearly industry standard, and in many cases they’ll cost you as much as 10% if you need to make a withdrawal before your investment has aged for at least 10 years. A lot can happen in ten years, and frankly, you don’t want to pay a hefty sum just to get access to your money.

Also, regardless of how long you’ve owned the annuity, the IRS will want its fair share if you make a withdrawal before turning 59 and ½ years old. This penalty is 10% too, and when compounded with the surrender charge from the institution backing the annuity it can add up to a lot of money.

How to prevent it: Plan for an emergency fund of 3-6 months of income before investing in anything. Whether it be your own business or your retirement.

Don’t Be A Scared Investor

Far too many eventual retirees look at what they have to lose over what they have to gain. While annuities may be safe, their historic returns do not allow for the same kind of capital appreciation as that of a stock mutual fund or exchange-traded funds. However, on the plus side, they do offer security, security that you may end up paying extra for should the markets continue going up while your annuity produces returns equal to that of a bond portfolio.

Consider buying an annuity later in your retirement plan than sooner. Since you have plenty of time to correct investment mistakes made in your early career years, use that to your advantage and “splurge” on a little extra risk. The annuity portion of your retirement plan should never be greater than the amount that you would invest in other “fixed income” investments like bonds, CDs, or money markets. So if you’re a 20-something with 80% of your retirement plan going into annuities, well, you might be playing it a little too safe. Too much safety is just as dangerous as too much risk.

How to prevent it: Ease into an annuity as you age, and as your reallocate your assets from equities and into fixed income investments. Too much safety is a risk all in its own.