Whether to purchase an annuity as part of a structured settlement should be based on sound financial and tax analysis. That’s not always the case. A New York Times article from awhile back discusses some of the emotional factors and misconceptions that come into play when considering an annuity purchase. Here are some.
Buying an annuity is bad deal for heirs.
For injured parties, a guaranteed amount of the settlement annuity payout can be passed down to beneficiaries.
Annuities are too confusing.
Granted, annuities don’t fall into the same category as your typical straightforward stock or bond investment, so when it comes to structured settlements, it is up to legal counsel to ensure an annuity broker explains all aspects to the claimant.
The insurance company issuing the annuity may not be stable.
Insurance companies that issue annuities must meet strict financial requirements. Only those highly rated by the rating agencies (Moody’s, A.M. Best, Standard & Poor’s) are selected for structured settlement annuities. By regulation, all annuity reserves must have assets that are equal to or exceed the corresponding payment obligations.
Structured annuities do not generate returns as high as other investments.
Once their tax-free status is factored in, returns on annuities are comparable to returns on many fully taxable fixed rate investments. Plus, structured annuities should be viewed more as insurance than investments. They give injured parties the peace of mind that they will receive guaranteed income as long as they live. Annuities reduce monetary risk, while self-managing investments increase risk.
Feel free to give me a call with any annuity questions