by John Darer® CLU ChFC MSSC CeFT® RSP CLTC
Members of the settlement community have a responsibility to accurately describe structured settlement and/or settlement planning related terms and jargon. Who better than the experts? Inaccurate use of industry jargon gets picked up by content generators without the expertise to correct the inaccuracy which then proliferates to the detriment of consumers and the industry as a whole. A good example is where factoring companies claim to buy structured settlement annuities
Some other examples:
- Secondary market annuities
- Awarded a settlement
- Sell your settlement
Recently I saw a story where annuitants were inaccurately described as a policyholders. Let me break it down for you.
- A structured settlement is a method of settling a lawsuit in exchange for part of the damages being paid in a negotiated stream or streams of future periodic payments.
- A tax-exempt structured settlement is funded with a "qualified funding asset", which is often a structured settlement annuity, however it may also be funded with obligations of the United States Government (Treasury Funded Structured Settlement)
- When a structured settlement is funded with an annuity, the terms of the annuity are set forth in an annuity contract issued by a life insurance company.
- The purchase of a structured settlement annuity contact can be done in several ways:
A. Buy and hold method
Buy and hold is where the structured annuity is purchased and held by the purchaser. When it comes to establishing a structured settlement the purchaser cannot be the payee, so if the buy and hold method is used the purchaser is either the Defendant, or the Defendant's Insurer. In a buy and hold, the policyholder is the Defendant or the Defendant's insurer.
B. Qualified Assignment method
When a qualified assignment is used in an annuity funded structured settlement, the future periodic payment obligation is assigned, with the consent of the parties, to a qualified assignment company, which is generally a subsidiary of the life insurer or a related entity in the corporate family. The qualified assignment company then purchases the qualified funding asset. With the qualified assignment method, the qualified assignment company is policyholder.
C. Non Qualified Assignment method
A tax deferred structured settlement method used when a structured settlement is desired but damages are taxable. When a non qualified assignment is used in an annuity funded structured settlement, the future periodic payment obligation is assigned, with the consent of the parties, to a non qualified assignment company, which is generally an offshore company**, often in Barbados, and an unrelated entity to the annuity issuer. The annuity issuer may provide a guarantee of performance or a keep well agreement of the assignment company. Similar to a qualified assignment, the non qualified assignment company then purchases the qualified funding asset. With the non qualified assignment method, the non qualified assignment company is policyholder.
D. Reinsurance Method
Reinsurance, in its simplest terms, is insurance of an insurance company, a form of risk transfer. In terms of risk bearing there is a similarity to the buy and hold and assignment concepts when using three party reinsurance agreements in lieu of assignments. A three party reinsurance with release sees the releasing party consent to look to the insurer for future payments instead of its reinsured, the insurer of the defendant. With a two party reinsurance agreement there is still contingent liability for the insurer (reinsured) similar to a buy and hold. Regardless of the reinsurance method, the person who receives the reinsurance structured settlement payments is not a "policy holder" or a reinsured for that matter.
So what is the person receiving the payments called?
The Payee, The Annuitant, the Measuring Life, or possibly in the case of Reinsurance, the Reinsured ( In some cases more than one of these)
Related Reading An Annuitant, A Measuring Life, A Payee and a Beneficiary Walked Into A Bar... April 12, 2012
Can a policyholder receive payments from a structured settlement annuity?
Yes, where a Defendant or Defendant's Insurer has used the buy and hold to purchase an installment refund annuity or a cash refund annuity. This would occur where a Defendant or Defendant's insurer has a large New York judgment to pay subject to New York CPLR Articles 50A or 50B. or other elsewhere where a significant life contingent cash flow being structured elects to insure against mortality risk where there obligation only exists where the plaintiff is alive.
**In 2021, there are a number of entities that have domestic non qualified assignment companies.