by Structured Settlement Watchdog
By examining the difference between a life settlement transaction and a structured settlement factoring transaction we can continue to home in on why the use of the term "secondary market annuities" to market factored structured settlement payment streams is a marketing fraud on investors.
What is a Life Settlement?
The sale of a life insurance policy is called a life settlement. A life settlement is the sale of an existing life insurance policy to a third party for more than its cash surrender value but less than its net death benefit. In a life settlement transaction, the policy’s owner transfers ownership of the policy to the buyer in exchange for an immediate cash payment and, in some instances, a reduced interest in the death benefit for the policy’s beneficiaries. The buyer of the policy pays all future premium payments and receives the death benefit upon the death of the insured (when the policy matures). A life settlement is different from a viatical settlement in that the individual insured on the policy has a longer life expectancy. In a viatical settlement, the life expectancy of the insured is 24 months or less.
Step 8 in the Life Settlement Process "The insurance carrier is notified of the change of policy ownership and beneficiary to the new owner, the provider."
[ Source: Life Insurance Settlement Association]
What is a Structured Settlement Factoring Transaction?
The term “ structured settlement factoring transaction "means a transfer of structured settlement payment rights (including portions of structured settlement payments) made for consideration by means of sale, assignment, pledge, or other form of encumbrance or alienation for consideration". [ Source: IRC 5891(c)(3)(A)]
IRC 5891 (c)(3 (B) Exception Such term shall not include—
(i)the creation or perfection of a security interest in structured settlement payment rights under a blanket security agreement entered into with an insured depository institution in the absence of any action to redirect the structured settlement payments to such institution (or agent or successor thereof) or otherwise to enforce such blanket security interest as against the structured settlement payment rights, or
(ii) a subsequent transfer of structured settlement payment rights acquired in a structured settlement factoring transaction.
Fundamental differences between a life settlement and a structured settlement factoring transaction
- Life settlement involves the sale of an actual policy. A structured settlement factoring transaction does not.
- A structured settlement factoring transaction involves the transfer of structured settlement payment rights not the transfer of annuity ownership
- A subsequent transfer of structured settlement payment rights is not a structured settlement factoring transaction or a transfer of annuity ownership since the annuity ownership was not transferred in the first place.
Life settlements are typically under the purview of state life insurance departments. In Connecticut for example, life settlement is a line of authority under an insurance license. The state regulator has the power to fine, suspend or revoke the authority. By contrast regulation of authority to engage in structured settlement factoring transactions, solicit annuitants, solicit investors in factored structured settlement payments streams is the exception rather than the rule.