A lifetime annuity turns part of your settlement recovery, or savings, into stable guaranteed income you can’t outlive. With a structured settlement, stable guaranteed income can begin right away (typically at least one month from funding), or it can be deferred or you can have more than payment stream and do both.

A lifetime annuity

• turns part of your settlement recovery, or savings, into guaranteed income you can’t outlive. The mortality risk is shifted to a life insurance company whose business it is to assess mortality and who possesses the economy of scale to spread that risk out over all of its policyholders and annuitants.
• can lock in an immediate or deferred income stream for life (immediate annuity or deferred income annuity)
  
• means you can receive stable, secure, guaranteed* payments regardless of market conditions
• payments may cease upon the death of the measuring life, OR can include guarantees that provide an alternative way to address the possibility that the measuring life will die prematurely.

A lifetime annuity is an financial tool worth considering, if you have longevity in your family and/or you are confident that you could live a long time from the present and want to make a financial allocation to help make sure you have ongoing income.

What Do Americans Worry the Most About?

According to a survey by Go Banking in October 2022, 66% of Americans fear that they will run out of money during retirement. Additionally, 50% stated concern that they will have an unexpected major health expense, and 21% worry that they'll be forced to retire earlier than expected. Financial concerns for covering retirement expenses continue as 21% fear that they won't be able to find a part-time job for extra income and 47% expressed concern that Social Security will be cut or end completely.

 A statistic that may surprise you

Go Banking reported that its survey found that the majority of Americans who fear that they will run out of money during retirement are those far from retirement age, as 74% of respondents who voiced this concern were between the ages of 25 and 34. The survey revealed that concerns about running out of money dwindled with age, as 56% of Americans 65 and over (still a majority) shared this concern.***

Taxation of Lifetime income Annuities

Generally, with respect to income taxes,

• where a structured settlement annuity is paid for a lifetime, the payments are free of income taxes, if the payments represent damages on account of personal physical injury or physical sickness or are payments from a workers compensation , or wrongful incarceration claim. [for more information see Internal Revenue Code Sections 104(a)(1) and 104(a)(2).  For Wrongful Incarceration see IRC 139F ]
• if the lifetime annuity is purchased by you from your after-tax savings ("non qualified" annuity ), some of the income is not subject to tax. To figure out how much income is excluded you must first calculate the exclusion ratio. The exclusion ratio is your net investment in the annuity (amount you paid for the annuity) divided by your expected return from the plan. The expected return is the total amount of annuity payments that you'll receive. Generally, an annuity provides for lifetime payments, so the total amount of annuity payments depends on your life expectancy at the annuity starting date. For example, if your net investment is $100,000 and the expected return through your life expectancy is $250,000 then the exclusion ratio is .40 (100,000 divided by 250,000). [ for more information see 26 CFR 1.72-4 - Exclusion ratio]
• if a lifetime income annuity is purchased as part of the settlement of litigation where the damages are fully taxable (for example an employment related settlement), or as a distribution from a qualified pension plan, then each annuity payment is fully taxable. There is no exclusion ratio.

What are the Other Types?

Types of Structured Settlement Payments? Annuity Payments?

Notes:

 * subject to the financial strength and claims paying ability of the annuity issuer. 

** "you could live for miles and miles and miles" is a parody of part of the chorus from "I Can See for Miles", a 1967 song by The Who, written by Pete Townshend and is not intended to imply any endorsement, or that buying an annuity for retirement, or agreeing to a structured settlement, has any effect on your longevity.

***"66% of Americans Are Worried They’ll Run Out of Money in Retirement",  by Maddie Duley October 27, 2022

Last updated April 1, 2023