When you are awarded an annuity or structured settlement, you are likely to be excited about the long-term payments. You may also have an immediate financial need because of the incident leading to the annuity. A pre-settlement loan seems like an attractive option, but there are things that you should consider first – like what will you do in retirement if your Social Security earnings are not enough to maintain your household?
Paying Taxes on the Loan
An annuity is considered to be taxable income. You will receive tax paperwork for your annuity separately from other income statements. If you choose to take a pre-settlement loan, especially if it is for the entire amount of your judgment, you still have to pay taxes on it. If you do not set aside the proper amount for taxes, you will end up having an outstanding tax liability that you will be responsible for paying.
You are not taxed on your judgment amount until a payment is disbursed. The taxable amount each year on your income taxes is the amount of payments you received that year.
Reduction of Annuity Value
If you take a partial loan, the amount of the loan will be deducted from your annuity’s total value. There may also be a penalty attached to the advancement. Some annuities are structured to include penalties for taking advance amounts, selling partial amounts, or selling the entire annuity.
It can take up to 45 days for your first payment to arrive, so taking a partial settlement or small advance can help if you are in an immediate financial need of some of those funds.
Shortens Payment Schedule
When you take an advance or settlement loan on your annuity, that amount reduces the total value but also reduces the number of payments that you will get. Payment amounts are not adjusted to reflect the amount of a loan so that you still receive the same amount of payments. Essentially, you are shorting yourself of money now that you are likely to need later.
Avoid No Risk Loan Options
Some settlement loan companies advertise no risk loans. These are attractive to annuity investors since a 4-percent to 7-percent return is often generated. Annuity investments are becoming more popular because it is a very low-risk investment. Annuities, when won, are guaranteed money. The bad end of the deal can be for you, some investors will offer you less to make more themselves.
It is important to know what is fair, so go into this negotiation with an attorney or financial advisor so that you control the yield for the investor providing the pre-settlement loan funding.
Harder to Manage Lump Sum of Money
One important reason to reconsider a pre-settlement loan is because a large chunk of money sitting in your bank account is enticing. You are more likely to spend that large amount of money much faster than the amount of time it would take to receive your monthly payments. You can get into more financial trouble taking a loan for your entire settlement amount.
It is a bit more frustrating to setup a trust fund for yourself that structures deposits each month than it is to just leave the payments up to the insurance company responsible for paying your annuity. Even with a trust fund, if you are the primary account holder, you control how the account functions. You could be enticed to remove restrictions and allow full access to all of the funds, which may cause you to spend the money irresponsibly.
Consider your Financial Future
What are your financial needs going to be in the future? Will you be able to live off of Social Security once your annuity money is gone? This is the big question that you have to ask yourself before taking a pre-settlement loan. An annuity is setup to provide income over a long period of time. For some, these payments could last the rest of your natural life. Not having that income, especially when emergencies arise in your later years, can cause great financial difficulty if home repairs or major medical expenses arise.
You have to take all of these things into consideration before deciding to take a pre-settlement loan offer. It is a better option to take a partial amount rather than a loan on the entire amount. You can at least put the remaining payments into an interest bearing savings account to save for retirement or emergencies. Also you can always factor your payments in the future using a reputable company like Annuity Sold to help.
Would you take a pre-settlement loan in full, a partial amount or not at all?