What is a Structured Settlement?
A Structured Settlement is an Agreement for one party, typically an Insurance Company, to pay another party, some future disclosed amount of cash
Results from some form of accident
What documents are “created” in a Structured Settlement
- Structured Settlement Agreement
- Qualified Assignment
- Annuity Application
- Annuity Policy
- Court Order Approving Minor’s Claim
- You can cash in your structured settlement payments.
What is an Annuity Policy
An annuity policy is the guaranteed “promise to pay” a declared amount to the Payee (plaintiff)
What will an Annuity Policy Show?
- Payee/Measuring Life
- Beneficiary
- Policy Number
- Issuer
- Owner
- Date of Issue
- Payment Stream to be paid
Structured Settlement Annuity
A structured settlement annuity is a single premium immediate annuity, but defers from a traditional single premium immediate annuity. To understand this, one must first understand both products.
You can cash in your structured settlement payments
What is a Single Premium Immediate Annuity?
A Single Premium Immediate Annuity (“SPIA”) is a contract between a person or entity and an insurance company. By paying in a lump sum of money the person or entity is guaranteed to receive a series of payments over a period of time. The amount of the payment is determined by both the current interest rate at the time the contract is issued and by choices made from a wide variety of payment options. Once the contract is issued, the annuity payments are fully guaranteed for the period of time the person or entity has chosen.
The person or entity that initially provided payment owns the traditional SPIA. The purchaser at the point of sale may name an alternate owner of the SPIA other than purchaser. In the event the Annuity Issuer cannot make payment the State Life & Health Insurance Guaranty Association steps in and assume the responsibility of the Annuity Issuer.
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State Life and Health Insurance Guaranty Associations
If an individual is receiving benefits from an insurance company in the form of an annuity and the insurance company becomes unable to pay, a state guaranty association may be responsible for all, part or none of the annuity. All states, Puerto Rico and the District of Columbia have guaranty associations that protect policyholders, up to specified limits, in the event an insurance company is financially unable to meet its obligations.
How many structured settlements are created yearly
- Over $7 Billion in Settlements will be created in 2003
- Amount will increase an estimated 15% yearly through 2019
- 200+ Deals a month completed by funding sources
Customers typically decide to sell their structured settlement payments due to some financial hardship. Usually the customer will go with the person they feel most comfortable with, regardless of “price”.
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New Federal and State Laws Regulating a Sale
Due to new State and Federal Laws, the closing process now takes anywhere from 3 to 6 months to complete. Do not be “fooled” by companies that say it can be done quicker. Only in rare cases can this timeframe be shortened to 2 months. On the Federal Level, in order to avoid any tax liabilities, either to the customer or the funding company purchasing the payment stream, a court order is now required.
On the State Level, 36 states currently have passed new “Structured Settlement Protection Acts” which regulate exactly how the court Order process is completed.
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The Closing Process
On paper, the closing process seems very simple. However, in order to comply with each state law, certain time frames must be met.
The closing process flows as follows:
- Initial submission of settlement documentation
- Disclosure Statement
- Closing documentation
- Attorney Estoppel letter
- Petition for Court Order filed
- Court order is obtained
- Insurance Company acknowledges assignment
Submission Documentation
When submitting a file to a funding source, some initial documentation is needed to begin the closing process.
You should obtain the following:
- Application for sale
- Annuity Policy
- Check Stub
- Settlement Agreement
- Qualified Assignment
- Payment stream to be purchased
- Purchase Price you are paying to the customer
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Disclosure Statements
Based upon each state’s laws, the disclosure statement must be provided to the customer anywhere between 3 to 14 days prior to the customers receipt of the transfer agreement.
The Disclosure Statement must show:
- Amounts and due dates of payments being assigned
- The current IRS Discounted Present Value of the payments
- The Gross Advance Amount and the Annual Discount Rate
- An Itemized listing of all commissions, fees and expenses
- The Net Amount to be received by the seller
- Several other minor disclosures required per state
Transfer Agreements
Once the customer has received the Disclosure Statement, and the allotted time has expired, the transfer agreement can be sent to the customer for signature.
The documents sent to the customer are:
- Transfer Agreement
- Testamentary Agreement
- Updated Application
- Fee Agreement (In some cases with the Disclosure Statement)
- Attorney Estoppel Letter
- IRS form W-9
Attorney Advice
Attorney advice in any type of financial transaction is smart for a customer. However, not all states require the customer to obtain said advice.
Based upon the laws to be used on your customers transaction, he can either:
- Waive legal representation in the Transfer Agreement
- Obtain legal advice and have their Attorney prepare and sign an Estoppel Letter
Court Order Process
The court order process is generally the longest part of the overall closing process.
Steps taken during this process are:
- Attorney obtains complete file and reviews documentation
- Drafts of Petition and Order are reviewed by funding source
- Petition is filed (must allow 20 to 30 days notice to all interested parties prior to actual court date)
- Court Date is set
- Judge hears arguments and approves the order
- Judge signs the order (can be immediately or at a later date)
- Court Order is provided to the funding source
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Insurance Company Acknowledgement
Depending on which funding company you use, the Funding of proceeds to the customer can take place either after the court order is received or after the Annuity Owner and Issuer approve of the changes to the Annuity Policy. If the funds are dispersed after the court order is obtained, the dispersal is usually 5 to 7 business days after receipt of the court order.
If the funds are dispersed after the Insurance Company Acknowledges the assignment, the funding can be anywhere from 30 to 45 days after receipt of the court order.
Individuals awarded future payments through litigation derived from personal injury misfortune have sold the right to receive these payments for years. The industry that grew up around this consumer need operated without regulation until January 2002 when the U.S. Congress stepped in and legitimized the process, demanding that the practice be approved by a judge following scrutiny of the transaction.
Assignment of Structured Settlement payment rights (Non Assignable Redirection)
The claimant and funding company enter into a sale and assignment agreement and other related documents, where in consideration for a lump sum payment, the claimant agrees to assignment their rights to receive payment under the release and settlement agreement and the annuity contract to the funding company. The funding company secures their assignment of payment rights by filing UCC1 under article 9 of the Uniform Commercial Code. The funding company also has the claimant redirect annuity payment to an address or bank account controlled by the funding company.
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