Cash Now vs Slow Annuities: Why the former is better?

Corey —  March 3, 2014 — 3 Comments

If you have been injured in an accident or you have won a worker’s compensation claim or you have won a settlement for the wrongful death of a person you depended upon, then in all probability you will get the compensation you are to receive in the form of an annuity. This annuity pays out awards from any form or type of legal settlement or lottery winnings or as has been mentioned earlier, any award from worker’s compensation claim or personal injury case in the manner of a periodic inflow of cash which has a number of tax advantages added with it. This sort of annuity scheme is called a structured settlement which is the most beneficial and most advantageous way to avail money to be received in the form of settlements.

The many advantages of structured settlements

There are many benefits of structured settlements, the most noteworthy among which is the exemption from all form of taxes, be it state taxes or federal taxes or local income taxes. This means that the savings of the investor in structured settlements is much higher than the investor in any other securities. In addition to this the fact that this form of annuities does not depend at all on any economic condition and the payment can be scheduled upon your wish and desire and can be deferred or may begin immediately makes up for the icing on the cake.

What is a cash annuity and what are its variables?

If at any moment you find yourself trapped in any financial difficulties and are in dire need of cash then you may sell your annuity and upon the determination, receive a lump sum amount in lieu of your future annuity incomes. In determination of the amount one will have a number of factors need to be taken into consideration, these are as follows:

  • Interest rate – The interest rate plays a crucial factor in determining the amount one receives on sale of annuity.

  • Inflation – The ongoing rate of inflation in the economy will also affect the amount receivable on the sale of the annuity.

  • Payments- The amount of annuity that one wants to sell will also be a factor in determining the cash amount which will be received by the investor wanting to sell the annuity.

  • Demand- At last, the demand for the payments will also affect the scales when it comes to determining the amount that you are likely to receive upon sale of the annuity.

The benefits of selling structured settlement annuities

When one decides to sell off structured settlement annuities, he or she is subjected to a number of benefits. These advantages are enumerated as below:

  • Liquidity – Probably the most important factor of selling structured settlement annuities, liquidity assures you that you will not be cash strapped. This liquidity backs individuals not only financially but also mentally to go ahead with their dreams, plans and ideas. Whenever facing a financial crisis, you can encash your structured settlements and get lump sum cash.

  • Time value of money – When one sells structured settlement annuities, one can also take advantage of time value of money. Generally, it is seen that the rate of earning in case of the money in hand is much more than the amount which may be received on a future date. Inflation reduces the future value of money and hence the earning capacity is much more if the amount is given a chance to earn interest.

Slow annuities – what are they and what are their benefits

Slow annuities generally refer to normal annuities which cannot be cashed when one desires i.e. in the contract of the annuity with the company there is no clause as to sell the annuity before its maturity. These annuities are suitable for those who are assured that they will not be subjected to any financial problems. There are a number of benefits of these annuities as well such as:

  • Tax Free: Most of such annuities are freed from the burden of tax by the Internal Revenue Service (IRS). This implies that your savings will be more.

  • Not affected by the economic condition: These annuities are not at all affected by the economic situation and are hence risk free.

Why opt for selling them off rather than clinging on?

When one has to make a choice between encashing now and letting the annuities continue, one must weigh in pros and cons of both and after careful analysis it will be evident that it is far better to go for the former:

  • An investor is assured of availability of cash in his hour of need.

  • Money which is in hand at the moment, if invested will fetch a lot much more than the amount which one will receive after a decade or any time period.

  • In case of slow annuities, IRS applies penalties and a huge surrender charge also has to be paid if one withdraws fund before the completion of age of 59 and half years.

  • With the rise in inflation the actual value of money that one receives in a slow annuity is less.

So, now that you are aware of all the factors as to why encashing now scores over slow annuities, invest wisely and efficiently!

Corey

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Corey is currently pursuing a Master of Arts degree in religion. While he enjoys learning and writing about Christianity, another one of his new passions is writing about personal finances in order to help others make wise decisions with their money.

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