You might be perplexed about pondering over the differences and similarities between the two terms, structured settlement and annuity. And to solve it, this article will help you out to clear the air and provide a deeper insight into the two.

How are they related?

Before getting to know the difference, be clear about why the terms sound similar. The huge similarity that prevails between a structured settlement and annuity is that they give you financial stability in the form of a secured income in your life.

Difference between a structured settlement and an annuity:

A structured settlement is a legal payment provided as compensation. It would act as a tax-free income throughout the duration. On the other hand, an annuity is an investment you save little by little that multiplies on the other side due to interests. It then pays you back in the later period.

What exactly is an annuity?

Annuities are investments that you secure through contracts in various financial institutions. The amount you pay is invested and is bounced back to you as a huge income during the retirement period. This scheme mainly helps people to have secured financial stability when they have no income through a job.

Phases in an annuity:

It has two phases to develop and to gain the amount.

Accumulation Phase: This is the first phase. During this period, you can invest funds in a lump sum or small amounts through periodic payments. The goal is to let the money multiply by accumulating interests.

Annuitization Phase: Once a certain period is reached, the investment you’ve made will start paying you. You can choose to receive it as a lump sum, or in the form of a steady cash flow over some time or even throughout your lifetime.

Is Annuity similar to Life Insurance?

There is a fine line between a Life insurance scheme and an annuity. Insurance comes for the rescue to cover the income of the family after the mortality of the insurance holder. Whereas annuity can be a financial beneficiary for the investor himself during his retirement age.

Should tax be paid by the annuitant?

If you withdraw the annuity after the age of 59½, you need not pay any tax for the income you receive, it is 100 per cent tax-free. But if the situation lies on the other side, you might need to pay additional taxes accordingly.

What will happen to the annuity if the annuitant dies?

In such cases, the designated beneficiary will continue receiving the annuity. The beneficiary might be a family member, friend or even a non-profit organization like an orphanage or an old-age home.

Taking risks:

Normally, an insurer can keep your money after your death. If you wish to outlive all your investments during your lifetime, you can choose a single pay-out without adding beneficiaries. But when you add a joint beneficiary, the pay-out amount will be reduced due to reduced risk.

Risks are always part of life, but investing in a secured retired life is an essential part. Take wise actions to enjoy during your retirement age.