Structured settlements: what are they?

What is a structured settlement annuity?

A structured settlement annuity (SSA) is a contract issued by an insurance company that originated from a legal action such as a car accident, work accident, wrongful death, medical malpractice, etc. The original claimant (plaintiff) chose to accept a series of payments instead of a lump sum settlement. This series of payments is guaranteed by a US-based insurance company and is in the form of a fixed annuity.

In about 20% of cases, claimants (or their heirs) choose to sell their SSAs (in whole or in part) in exchange for a discounted lump sum in cash today.

What is the process when a claimant decides to sell their SSA?

Plaintiffs who are considering selling their SSAs look for factoring companies that are institutions that buy SSAs. Claimants seek to obtain the largest lump sum of cash today in exchange for the rights they waive to receive those future payments.

This process must go through the court system that protects both the claimant and the factoring company in the sale of the SSA. Once the agreement is made and approved by the courts, the factoring company pays the original claimant the agreed amount in a lump sum and the claimant signs all rights to receive those future payments.

When a factoring company purchases an SSA from a claimant, it offers to sell the court-ordered rights to recover the funds it paid. Some factoring companies package SSAs and sell them on Wall Street or to large institutional investors and pension plans. Some factoring companies sell them to individual investors through a broker network as a safe money alternative, which are good options for both IRA and non-IRA funds.

Payment streams can be continuous monthly payments over a set period of time, or they can come in the form of a deferred lump sum.

The security is in the insurance company that supports the flow of payments. In addition, in most states there are state guarantee associations that back the principal of these annuities up to a certain amount. These are fixed annuities and as such they are granted this protection.

The judicial process is designed to protect all parties. The court sends a letter to the underlined insurance company notifying them that your policy owner (the claimant) has sold the rights to your contract to the new owner. Once the insurance company responds and accepts (Letter of Acceptance) that the transfer of ownership is completed, the guarantee to the new buyer.

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