Glossary

Here are a few definitions to help you understand the secondary market for structured settlements.

Structured settlement

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 reliable income stream. The party making the payments knows in advance how much it will have to pay. 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.

Primary market

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 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. The 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.

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 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. Federal law requires all structured settlement sales on the secondary market to be reviewed by a judge.

Discount rates

The rate used to convert future receipts or payments to their present value. It typically ranges from 12% to 22%, 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 state law restrictions on discount rates.

Excise tax

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.

Funding company

A firm that buys future rights to payments from individuals and companies at a discount and gives the seller cash. 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. Used by 47 states to write their own transfer statutes, it requires disclosures and court approval of all structured settlement transfers. It was written by NASP and the National Structured Settlement Trade Association, and was adopted in 2001 by the National Conference of Insurance Legislators.

Payee

An individual who receives tax-free payments under a structured settlement.

Transfer

Any sale by a payee of his or her rights to future structured settlement payments in exchange for money or other consideration.

Transferee

The company or person who acquires structured settlement payment rights through a transfer or sale.