Even though winning the lottery seems rare, there are a lot of people who need to understand the annuity and lump sum difference. Winning a court settlement can mean you are entitled to payments that you can either get as an annuity settlement or get immediate cash. These payout options can be confusing and you should have all the information before making a decision.
A lot of money is tied up in annuities, about $2.58 trillion at the end of 2013. Megamillions and Power Ball typically do 30 annual payments that increase over time. This type of annuity means that the receiver could be financially stable for life, knowing exactly what they will be receiving. However, since they increase over time, you may not end up getting all the money owed to you. There are companies that purchase structured settlements and annuities and then give the seller a lump sum of cash.
Selling an annuity for cash isn’t free, and can even cost up to 10% of the total sum. So there is a price for getting the immediate cash, and this needs to be taken into consideration. It probably depends on the amount of money and how long the annuity is supposed to go on for, in addition to a person’s financial situation at the time of winning, to decide on the annuity and lump sum difference.
Receiving a lump sum of cash seems like a great thing, but the person has to be good with managing money. It’s easy to get used to a certain lifestyle and not be able to maintain that without future income. Some people even run out of money and end up in a financial disaster. In this situation annuity would be better because you know that you have income for the next 25 years, or even your lifetime. The dealbreaker may be the statistic that 92% of sellers of structure settlement for cash payout are happy with their decision. As powerful as that sounds, the decision should come down to your own preferences and money management strategies.