Structured Settlements Info

What is a Structured Settlement?

A structured settlement is a financial or insurance arrangement that a claimant accepts to resolve a personal injury tort claim or to compromise a statutory periodic payment obligation. Structured settlements were designed as an alternative to lump sum settlements. Structured settlements / payments are often referred to as “periodic payments.”

In the United States, there are structured settlement laws and regulations at both the federal and state levels. Federal laws refer to sections of the Internal Revenue Code.  At the state level, the laws include structured settlement protection statutes and periodic payment of judgment statutes.

Legal Structure

In general, a structured settlement scenario is as follows:  The injured party (claimant) settles a tort suit with the defendant (or its insurance carrier) pursuant to a settlement agreement that provides a series of periodic payments in exchange for the claimant’s securing the dismissal of the lawsuit. The payments are the responsibility of the defendant or its insurer. To fund these payments, the insurer usually purchases an annuity from a life insurance company.

Unassigned case: The insurer retains the periodic obligation and funds it by purchasing an annuity from a life insurance company, which offsets its obligation with a matching asset. The payment stream purchased under the annuity exactly matches the periodic payments agreed to in the settlement arrangement. The insurer owns the annuity and names the claimant as the payee under the annuity, and directs the annuity issuer to send payments to the claimant. The periodic payments may be life-contingent (obligation to make a payment is contingent on someone’s life), the claimant (or the person whose life is measured) is named as the annuitant.

Assigned case: In assigned cases, the property/casualty insurance company does not want to retain the long-term periodic payment on its books, so the insurer transfers the obligation through a qualified assignment to a third party. The third party (assignment company) will require the property/ casualty company to pay an amount sufficient so that it may purchase an annuity to fund its newly accepted periodic payment obligation. If the claimant consents to the transfer of the periodic payment obligation in the settlement agreement or in a special form of a qualified assignment, the defendant and/or its property/casualty company has no further obligation to make the periodic payments. This means that the property/casualty company no longer retains the periodic payment obligation on their books.  A typical assignment company is an affiliate of the life insurance company from which the annuity is purchased.

A “qualified” assignment must meet the criteria set forth in Internal Revenue Code Section 130 [3]. The qualification of the assignment is important to assignment companies because in its absence, the amount they receive to accept periodic payment obligations would be considered for federal income tax purposes. Under Section 130, the amount received is not included in the income of the assignment company. Without this provision, assignment companies would owe federal income taxes on assigned cases, and would have no resources from which to make the payments.