How to Choose Between a Lump Sum or Annuity?

Pre settlement loan rates

There are two ways to get “free” money in the United States: sue someone or win the lottery. Before everyone goes out suing people or spending their life savings on lottery tickets, it may be helpful to know how “free” that money really is.

The Real Lottery

Winning the Mega Millions would be a dream come true for many, but the 25% immediately withheld by the federal government is sure to wake some from that dream. An additional 6-9% is withheld off the top for state taxes as well. Rather than receive a lump sum, lottery winners receive an annuity; the Mega Millions starts with an initial payment followed by 29 annual payments that increase by 5% increments. Winners are then plagued by additional administrative, early withdrawal, and other fees if they violate certain stipulations.

What to Expect With a Structured Settlement

In many cases, civil cases will settle outside of court awarding the claimant with a structured settlement for damages. There are over $6 million paid out every year to fund new structured settlements, making the average structured settlement payout $324,000. Like the lottery however, the annuity settlement received is paid out over a number of years and protected with similar fees.

Choosing a Lump Sum or Annuity

Lottery winners and structured settlement holders have the option to sell their payments for a lump sum of cash, although selling a structured settlement or annuity can cost surrender charges totaling up to 10%. While it is abundantly clear that there is no way to get 100% of the pie, selling your annuity could be the best way to get the most of your money quickly. A study found that 92% of claimants who sold their structured settlement were pleased with their decision. Picking a lump sum or annuity is a decision that only you can make, but it is an option that will always be available to you.

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