Wednesday, September 09, 2009

Lump Sum Vs. Annuity Settlements

Carefully consider the potential ramifications of the various annuity payout options available to you before making a decision that affects the rest of your life

Annuity payments are a very common method of transferring large sums of money to a recipient over the course of time.  These types of structured settlements are often in the best interests of both parties.

The payor is not required to produce a large lump sum of money at one time, and the payee receives the benefits of a guaranteed stream of predictable recurring payments.  Many individuals choose to have their retirement funds paid to them in the form of annuity payments; traditional pension plan payments to retired workers are a form of annuity payments.

Many lawsuit payouts are in the form of annuity payments.


The purpose of annuity payments is to guarantee the recipient a steady income stream for a specified period of time.  By definition, annuity payments are predictable sums of money payable in one of several formats to the beneficiary.  

The power of annuity payments is that in most cases either the original principal amount or the recurring monthly payments is guaranteed.


In most situations, the annuitant, or recipient of the funds, is able to choose the frequency or method in which they will receive payments.  The most common option is called Life Only.  The Life Only method will pay the recipient a regular recurring amount for the rest of his life, regardless of how long he lives.  

The only potential downside of this technique occurs if the beneficiary dies soon after the payments begin.  The alternative to the Life Only pay out method is called Period Certain.  The Period Certain method guarantees the recipient a stream of payments for a specified duration, regardless of whether or not the original beneficiary dies.  In the event of the recipient’s death, the annuity payments may continue to another designated beneficiary.


The actual dollar amount of the annuity payments will vary with the payout option chosen by the beneficiary.  Typically, the Life Only payout choice results in the lowest recurring payment, but may offer the recipient the most security.  

This option usually pays the lowest amount because there is the possibility that the cumulative payments may result in an aggregate total that is more than the original principal amount.  Period Certain amounts will vary depending on just how long the specified duration lasts, but will be higher for shorter periods. 


Annuity payments are extremely powerful, especially when the recipient is receiving Life Only payments.  In that situation, the annuity payments are identical to a traditional pension plan payout.  

A person who is scheduled to receive a never-ending stream of regular monthly distributions for the remainder of their life may live with a level of comfort and confidence that not many individuals will experience.  


In many cases, annuity payments for younger individuals who are set to receive the Life Only option will also have a Cost Of Living Adjustment (COLA) included in the contract.  In order to keep up with the rising cost of inflation, many annuity payment contracts contain such increases to help the recipient maintain the same purchasing power over the course of several decades.  

Some COLA contracts feature a simple interest increase, which is a fixed percentage of the original annuity payment amount, whereas other contracts feature a compounding interest increase on the entire payment.

This article is a Twisted Nonsense Exclusive! (09/09/2009)

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