Here are a few definitions to help you understand the secondary market for structured settlements.
An arrangement that settles a lawsuit or workers’ compensation claim by letting the defendant pay the plaintiff money in installments over a period of time. They often are used in personal injury, product liability, and wrongful death claims. The person receiving the payments (also called the payee) benefits from a set payment income stream. The party making the payments knows in advance how much it will have to pay. Structured settlements encourage and enhance lawsuit settlements, which is sound public policy. Structured settlement payments that are part of a settlement reached in a physical injury or wrongful death case are not taxed as income by the IRS.
The industry that creates structured settlements. This includes insurance companies and settlement brokers. The parties in a lawsuit can decide that it would be appropriate to end the case with a structured settlement. Either the plaintiff or defendant (or both) may choose to hire a broker who will look for an appropriate annuity from an insurance company to fund the settlement. The brokers and the insurance company are all part of the primary structured settlement industry. Tax laws do not allow the parties to a structured settlement to increase, decrease, speed up, or delay the payments. This led to the development of the Secondary Market.
The industry that purchases structured settlement payment streams. Members of the Secondary Market buy all or part of a structured settlement from the payee (the person entitled to receive payments). This gives payees more financial flexibility and control over their financial assets. The payee assigns the right to receive future payments to a funding company. In return, the funding company pays the payee the discounted present value of the future payments. The amount of this payment is calculated using a discount rate. State and federal laws require all structured settlement sales in the Secondary Market (both literally and practically) to be reviewed by a judge.
The rate used to convert future receipts or payments to their present value. It typically ranges from 9% to 18%, depending on many factors, including how far in the future the payments will be paid, the costs incurred by the funding company that is purchasing the payments, the creditworthiness of the insurance company making the payments, whether the payments are guaranteed or life contingent, and other factors.
This is a tax that funding companies must pay if they go ahead with a structured settlement transfer without getting court approval or if they violate state or federal law regulating the transfer of structured settlement payments. This penalty serves to keep the Secondary Market accountable and transparent.
A firm that buys future payment rights from payees at a discount and pays the seller/payee a lump sum in return for future periodic payments. Examples of payments bought by funding companies include lottery winnings, structured settlements, and personal annuities.
Model State Structured Settlement Protection Act
A model law that establishes procedures for the transfer of future structured settlement payments. More than 49 states have enacted state structured settlement transfer statutes. Generally the statutes require disclosures to be provided to the payee before a contract to transfer can be signed by the payee and and court approval of all structured settlement transfers, although specifics vary from state to state, in 2001 by the National Conference of Insurance Legislators and supported the reenactment|updates to same since 2001.
An individual who receives tax-free payments under a structured settlement.
Any sale or pledge by a payee of his or her rights to future structured settlement payments in exchange for money or other consideration.
The company or person who acquires structured settlement payment rights through a transfer or sale.