by John Darer CLU ChFC MSSC RSP CLTC
What is a Structured Settlement Derivative?
Structured settlement derivative is an investment that provides the investor with a single future payment or a series of future payments funded by the assignment or transfer of future payments from a structured settlement contract. A structured settlement derivative is sometimes referred to as a "recycled structured settlement".
Investopedia defines "derivative" as a contract between two or more parties whose value is based on an agreed-upon underlying financial asset, index or security.
Structured settlement derivative is a more accurate term than secondary market annuity
While some refer to a structured settlement derivative as a secondary market annuity or SMA, such use of the term "annuity" by the salespeople is false or misleading.
- An annuity is a regulated financial product. Each state and the District of Columbia has its own regulator.
- The life insurer issuing the annuity must be admitted in your state
- The annuity contract must be filed with the state insurance and approved for sale
- The insurer is subject to annual audits for reserve adequacy.
- An annuity can only be sold by insurance agents who are licensed in your state who have solicitation agreements with the annuity issuer.
- Solicitation agreements with insurers require errors & omissions coverage
- State law generally requires the legal address of the company and the address of the home office to be clearly identified.
- Those with criminal records are typically barred from obtaining an insurance license
Structured Settlement Derivative (a/k/a Recycled Structured Settlement)
- Not a regulated financial product
- Underwriting is not performed by an admitted or licensed insurance company
- Exposure to origination risk if the deal does not comply with the relevant state structured settlement protection statute and the originator is no longer in business when that happens. [ at time of publication there are legal actions pending that seek to vacate transfer orders]. In more than 200 recent instances structured settlement transfer orders were forged by a paralegal or the lawyer representing the structured settlement purchaser/originator.
- May be offered by unlicensed and unregulated sales people who misrepresent the structured settlement derivative as an annuity and the misrepresent statutory protections in the event of insolvency of the annuity issuer underlying the structured settlement derivative. A proposed model act would specifically exempt structured settlement derivatives from statutory protections.
Structured settlement derivatives are bought up by originators, and generallypackaged and sold as a securitization to institutional investors, including hedge funds, banks and even insurance companies. In the last decade structured settlement derivatives were born, when credit lines dried up during the 2008-2009 financial crisis, structured settlement derivatives have been made available to individual investors.
Personal injury attorneys have been known to invest in structured settlement derivatives. Upon information and belief, in or about 2010 some settlement planners began offering structured settlement derivatives to injury victims, including brain damaged babies.. These structured settlement derivative investments were and are currently offered straight up, in a trust, in an LLC that receives the cash flows, in an IRA.