Structured settlement, or annuity? Financial terminology can get confusing very quickly for the uninitiated. The numbers themselves are intimidating, and the financial jargon that gets thrown around can make you feel like you’re listening to a foreign language. You may have trouble wrapping your head around even the simplest financial concepts, but not to worry. Nobody is born a financial pro. These are things that have to be learned slowly over the course of time in order to be truly understood. The difference between structured settlements and annuities is very fuzzy for many people, because at first glance these two things seem to be very similar.
Annuities and structured settlements both involve a regular payout to a beneficiary over a set period of time. Both involve the distribution of a monthly or yearly set income. However, this is essentially where the similarities between structured settlements and annuities end. Your regular paycheck also involves a regular payout over time, but you would never put it in the same class as an annuity, for example. Annuities and structured settlements are paid out for very different reasons, and they often come from different sources.
Generally, an annuity is an investment option offered by insurance companies, investment firms, lotteries, and a variety of other institutions. Most often, annuities refer to investments. The paying of an annuity to the beneficiary over time is meant to give a return on an investment. A variable life insurance policy, for example, may build a nest egg for the purchaser that can be collected as regular income to ensure a return on the investment of the life insurance policy. A lottery winner may choose to have their winnings paid in annual increments as a means of deferring taxes, or for any other number of reasons. These are both examples of annuities, which are designed to give an investor positive returns over time.
A structured settlement is quite a different affair altogether. Structured settlements are usually the result of a lawsuit involving a personal injury or other damages which must be paid to the beneficiary. After a court case related to matters such as an automobile accident or work related injury, a plaintiff may be awarded compensation. Sometimes, settlements like these are made outside of court. In general, however, a structured settlement is paid to the beneficiary as a means of compensation for damages, rather than an investment opportunity. This is the key difference between these two kinds of payouts, and it is a very significant difference.
When you talk about annuities and structured settlements, it helps to know the basic facts. Structured settlements and annuities can occasionally overlap, for example if settlement money is used to invest in annuity-related matters. In general, however, they are separate and distinct from one another. These are just two of the many financial terms you’ll need to know as you become more involved in financial matters throughout your life. The next time you hear of an annuity investment opportunity or have to use a structured settlement calculator, you’ll know exactly what you’re dealing with. Annuities and structured settlements are two very different animals, which share only a few traits.