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What Is an Annuity Settlement?

By K. Kinsella
Updated May 16, 2024
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During legal disputes, an annuity settlement occurs when one party agrees to buy an annuity on behalf of another party. Lawsuits related to injuries, criminal damage or unfair dismissal often result in an annuity settlement. Such agreements provide financial benefits to both the purchaser and the beneficiary of the contract when compared to straight cash settlements.

In many nations, plaintiffs can sue individuals and entities for damages in a variety of different circumstances. The amount of damages sought often directly relates to a financial loss that the plaintiff incurred such as the cost of medical bills or the cost of replacing a damaged piece of property. On some occasions, parties may also sue for damages related to intangibles such as pain and mental suffering. A judge presides over the case and makes a determination as to whether the plaintiff has a valid complaint against the defendant. If the judge rules in favor of the plaintiff, then the judge has to decide on the level of compensation that the defendant should pay that individual.

A plaintiff in a damages lawsuit can end up with more money by agreeing an annuity settlement with the plaintiff rather than requesting a lump sum damages payment. The defendant can purchase an annuity contract from an insurance firm and this involves the insurer converting the lump sum purchase premium into a lifetime income stream that the plaintiff receives. The annuity issuer pays interest on the premium so the total sum that the plaintiff receives actually exceeds the annuity purchase amount. An annuity settlement also benefits the defendant because the addition of interest to the premium means that the defendant can spend less to buy an annuity than it would have cost to settle the damages claim with cash.

The recipient of an annuity settlement could lose money in the long-term because annuity payments normally cease upon the death of the annuitant. Laws in many nations prevent insurance firms from selling annuities to elderly people because statistically these people are likely to die long before they see any benefit from buying an annuity. Despite the risk of death, some people prefer annuity settlements to cash payments because they pay less tax when the receive the money incrementally rather than as a lump sum in a single tax year.

Income annuities typically have no cash value which means that the annuitant cannot cash-in the account during the contract term. Laws in some nations allow annuitants to enter into viatical settlements which involve the sale of a life insurance contract or annuity for cash. The annuitant must agree a purchase price with a buyer and the buyer will continue to receive the annuity payments for as long as the original annuitant lives.

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