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What is a structured settlement to an annuity?

Remember that for most annuities, if you need to redeem your principal, you usually pay a significant penalty.  An industry has formed to provide liquidity to those who need it from their annuities.  These payouts are also called structured settlements, annuity settlements, payment settlements, etc.

When you bought your annuity, you were exchanging cash now for a stream of payments into the future.  In a structured settlement, you are exchanging a stream of payments into the future for cash now.  Essentially, a company is discounting a future stream of income back to the present at a discount rate.

Structured settlements can take many forms.  You can receive a lump sum payment for the entire annuity, a partial payment for a part of the annuity, say the first 5 years, or a shared payment where you take some percentage of all future payments and sell them. 

Most states have a law structured like the Model Act proposed by the National Conference of Insurance Legislators.  These acts usually require a court order to conclude a structured settlement.  On your part, you usually just fill out paper work and the structured settlement company does the rest with the court. 

Structured settlements are illegal in Connecticut, Illinois, Kentucky, Virginia, West Virginia and Texas.  Texas has legalized loans against your annuity instead of structured settlements.
In 1999, the IRS issued a Private Letter Ruling on structured settlements.  In 119273-97 of June 10, 1999, the IRS gave a ruling that the receipt of a structured settlement did not trigger a taxable event.  So, the tax benefits of the annuity generally have remained.

I am not an attorney or a tax specialist.  Because structured settlements may have legal or tax consequences, I would advise speaking to your accountant or attorney before concluding a contract.