by John Darer CLU ChFC MSSC CeFT RSP CLTC
Could factored structured settlement payment streams be useful settlement planning tools in certain types of cases if the transactional risks can be minimized/eliminated and are fully understood by buyers and certain settlement planners and other merchants stop misrepresenting them as annuities?
Factored structured settlement payment streams are not annuities according to the National Association of Insurance Commissioners (NAIC)
NAIC's members regulate the sale of annuities and insurance products. The NAIC's Statutory Issue Paper 160 dismisses the notion that acquired structured settlement payment rights are annuities or insurance products.
Offshore Non Qualified Assignment Companies Were The Norm
For many years the fulcrum for non qualified assignments was an offshore assignment company. Offshore assignment companies filled a void where the type of damages that the future payment obligations represent did not fall within the IRC 130 exclusion which applied to qualified assignment. Initially such assignment companies were established in Barbados, to support the needs of clients of appointed agents of Liberty Life Assurance Company of Boston (now Lincoln Life Assurance Company of Boston) Allstate Life Insurance Company, Prudential Insurance Company of America and briefly, American General, in Bermuda. Various independent assignment companies followed, mostly in Barbados and one in the Republic of Ireland. There are a number of solutions that are only available using an offshore assignment company.
Domestic Non Qualified Assignment Companies
MetLife introduced a domestic non qualified assignment program as an excellent option for settlements comprised in whole or in part with taxable damages, settlements that otherwise to do not qualify for IRC 130 (such as wrongful imprisonment), or for structured installment sales. Payments must begin within a year. The design for the funding asset, an immediate annuity issued by Metropolitan Tower Life Insurance Company, requires compliance with IRC 72(u). IRC 72(u) is also known as the "non natural person rule"
Treatment of annuity contracts not held by natural persons
(1)In general, If any annuity contract is held by a person who is not a natural person—
What is an immediate annuity?
Funding Agreement is Not an Annuity Contract
kind of business authorized by §1113 of the Insurance Law or engaging in any business authorized by §1714 of the Insurance Law.
series of such payments, or the amount of any such payment, depends on the continuance of human life”, except payments made under the authority of
§1113(a)(1) (i.e., optional modes of settlement of life insurance proceeds (a) As such, a funding agreement could provide for periodic payments over a
period certain for individuals in structured settlements or in cases where an annuity with life contingencies was not wanted.
2. In 1985, the term “annuity” was amended by adding the phrase “for a period certain or” following “periodical payments” in the definition of annuity. See §1 of Chapter 864 of the Laws of 1985. As such, an agreement to make “periodical payments for a period certain” could now be considered to be an
annuity as defined in §1113(a)(2). (a) The sponsor’s memorandum in support of Chapter 864 of the Laws of 1985 states that the bill would bring New York into conformity with approximately 38 other states that permit period certain contracts to be written for a period of years rather than for a period dependent on the continued life of the annuitant.
3. Funding agreements sold to entities are not annuities because:
(a) Annuitant must be a natural person. There is nothing in the bill jacket of Chapter 864 of the Laws of 1985 to suggest that the change in §1113(a)(2) was intended to broaden the class of purchasers beyond annuitants (i.e., natural persons).
(b) Installment payments at maturity of a guaranteed interest contract does
not make the contract an annuity. There is nothing in the bill jacket of Chapter 864 of the Laws of 1985 to suggest that the change in §1113(a)(2) was intended to expand the scope of such contracts to include unallocated funding agreements, such as fixed rate, fixed maturity guaranteed interest contracts that provide for installment payments at maturity rather than a lump sum payment. An unallocated guaranteed interest contract is either a funding agreement or a group annuity contract depending on whether the contract provides for or permits the purchase of annuity payments dependent on the continuance of the lives of more than one person. See §4238(a).
4. In addition, a period certain annuity is not a funding agreement because the issuance or delivery of a funding agreement cannot be deemed to be doing a kind of business authorized by §1113.
(a) It has been argued that structured settlements providing for periodic payments to individuals can be considered annuity contracts. However,
because §3222(b)(iv) specifically refers to agreements “ providing for periodic payments in satisfaction of a claim”, we continue to classify such
agreements to be funding agreements for review purposes.
(b) Agreements that provide for lump sum payments at maturity are considered to be funding agreements.
The Utility of Factored Structured Settlement Payment Streams
How Not Being an Annuity Presents an Advantage Under Certain Circumstances
- transactional risk (see ongoing cases Barber case and Keefer v Genex Capital et al. as well as Alcantara, Wall v Altium investor lawsuit, State of Maryland Attorney General Consumer Protection Division v Access Funding et al. and Crystal Linton et al v Maryland Consumer Protection Division, Barry Cooper v Horn, Hamlin et al. FINRA Complaint)
- the possible lack of statutory protections in the event of the insolvency of the issuer of the underlying annuity as set forth in the model act adopted by an increasing number of states.