by John Darer CLU ChFC MSSC CeFT RSP CLTC
Investors who buy structured settlement receivables are exposed to potentially devastating financial risk to their investments in the event of insolvency of the life insurance company that issued the annuity, that funded the structured settlement payment rights purchased by the investor.
Investors, financial advisers and insurers of financial advisors should be mindful of a crucial provision of the 2017 Life & Health Guaranty Associations Model Act (#520) which has been adopted by the majority of the United States when evaluating the suitability of structured settlement receivables as investments.
What is a Structured Settlement Receivables Investment?
A structured settlement receivables investment is an opportunity to invest money to acquire an assignment of someone else's structured settlement payment rights (or portions of those structured settlement payment rights) in the structured settlement secondary market or tertiary market.
Are Investors in Structured Settlement Receivables in the Same Position as a Structured Settlement Payee,or Someone Who Buys a Retirement Annuity?
No, an investment in a structured settlement receivable is NOT the same as buying any retirement annuity, or the purchase of a structured settlement annuity by a qualified assignment company. Unlike buying an an annuity, or the purchase of a structured settlement annuity, when a structured settlement receivable is purchased, no premium is paid to an insurance company. No premium is paid at all.
Certain actors, including some settlement planners and financial advisors, have falsely used the term "annuity" in marketing structured settlement receivables to investors, obfuscating the potential risks to investors, and even the judges tasked with approving them as part of a minor's settlement
In 2012, a California settlement planner submitted an under penalty of perjury affidavit supporting a petiton to establish a Qualified Settlement Fund in San Francisco County (ostensibly for the purchase of the receivables) while asserting in the affidavit that there was "no change in funding asset".
- An investment in structured settlement receivables is not the equivalent of someone who becomes a structured settlement payee as the result of the settlement of a personal injury, wrongful death or workers compensation settlement.
- The latter becomes a structured settlement payee by virtue of the negotiated settlement consideration in their personal injury or wrongful death lawsuit or workers compensation claim, wherein an obligation to make future perioidic payments is part of the consideration.
- The obligation of the Defendant/Respondent or its/their insurer to make the periodic payments in the settlement agreement may be assigned [subject to the terms of IRC 130(c)] to a qualified assignment company.
- The assignment company then buys an annuity (or annuities) to fund its periodic payment obligation.
Section 3A(5)(c) of the Life & Health Guaranty Associations Model Act (#520)
INVESTORS IN RECEIVABLES FACE SIGNIFICANT RISK OF LOSS OF INVESTMENT IN THE EVENT OF INSOLVENCY
(5) This Act shall not provide coverage to: (a) A person who is a payee (or beneficiary) of a contract owner resident of this State, if the payee (or beneficiary) is afforded any coverage by the association of another State; or (b) A person covered under Paragraph (3) of this subsection, if any coverage is provided by the association of another State to the person; or (c) A person who acquires rights to receive payments through a structured settlement factoring transaction as defined in 26 U.S.C. 5891(c)(3)(A), regardless of whether the transaction occurred before or after such section became effective".
In other words, in such case your investment the receivables will have the value and utility of something that is best suited for a schmear of butter and jam (or a dollop of baked beans (i.e. toast).
Drafting Notes to Section 3A(5)(c) of the Life & Health Guaranty Associations Model Act (#520) Crystal Clear
"Drafting Note: The exclusion from coverage in Section 3A(5)(c) of any person who has purchased from an original structured settlement annuity payee his or her rights to receive structured settlement annuity benefits and the exclusion of such benefits from covered benefits under Section 3B(2)(n) recognize that the protections afforded by guaranty associations are intended for insurance consumers, such as the original payees of structured settlement annuities. Guaranty association protection does not extend to sophisticated investors who acquire rights to receive structured settlement annuity benefits in the secondary market. These exclusions, however, do not apply to structured settlement annuity benefits that are transferred to children, present or former spouses or other dependents as part of domestic relations settlements or orders, or to other transferees (including donees) who acquire rights to receive structured settlement annuity benefits without providing any monetary consideration. Thus, Section 3A(5)(c) and Section 3B(2)(n) clarify that guaranty association coverage protects structured settlement annuity benefits to which the original payee and his or her family members retain the rights"
What if You Invested in Structured Settlement Receivables while Residing in a State That Hasn't Adopted?
- Just remember that in Dec 2018, the National Association of Insurance Commissioners (NAIC) published Statutory Issue Paper No. 160 (finalized April 6, 2019) which expressly stated that acquired structured settlement payment rights are not captured as an annuity or insurance product in statutory accounting. Then go back and read the Drafting notes above!
- Investment in structured settlement receivables were never an investment in an annuity, regardless of how they were labeled and marketed by secondary market companies, tertiary market companies, financial advisers to seniors, or certain settlement planners to trial lawyers for the trial lawyers or their clients.
- There's a certain inevitability to adoption of the 2017 Revisions to the L&HGA in all states, just like the Structured Settlement Protection Acts
What If You Invested in Structured Settlement Receivables While Residing in a State that Hasn't Adopted and Move to a State that Has Adopted the Model Act?
An attorney source opined that the law of the original residence state would apply.
The big ole "but" is that the "before and after the effective date" clause in the Life & Health Guaranty Associations Model Act takes no prisoners in the states where approved.
Figuratively speaking, that's like standing over the gallows for an agonizingly long time for the trap door to open underneath your feet triggering a swift but violent drop to snap your financial neck.
The 2017 L & H Guaranty Association Model Act was published in 1st QTR of 2018.
Last updated February 8, 2025
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