Structured Settlement is the special form of compensation amount payable for any form of damage done to a party (like injury by medical negligence) by another party against whom the victim files a lawsuit. The unique feature of this settlement amount is that it consists of one part of the amount paid to the claimant initially and the other part of the larger amount which is paid out to that party through installments instead of paying the whole compensation as a lump sum. According to the NSSTA (National Structured Settlement Trade Association), in order to make this form of compensatory mechanism more widespread, the Congress (United States) in 1982 laid down specific tax rules called the Periodic Payment Settlement Tax Act and the Section 104 (a) (2) of Internal Revenue Code stated that the whole amount of structured settlement would be tax-free to the claimant.
Who Purchases a Structured Settlement?
Creating an investment opportunity out of the structured settlements is a financial innovation popular in US, UK and Europe. It comes into play only when the holders of any such structured settlement wish to sell it off to an insurance company or to the dealers of such settlements in return for the lump sum cash either to fund their immediate heavy financial needs or to get rid of the periodic payments schedule and be done with it all at once. In either case, this new buying party, say, the insurance company then acts as an agent/broker and sells off this right to receive future installments to the investors who wish to buy such a policy of discounted structured settlements put up for sale. Discounted means the investor gets lesser amount than the full face value of the structured settlement. These investors are those people who wish to invest their money in the long-term structured periodic payments scheme from which they regularly get the income stream according to the terms of the structured settlement they are purchasing. It is important to note that this form of investment is made possible because claimants do not wish to wait for the settlement amount to come to them in installments and desire to exchange it for lump-sum cash.
How To Buy a Structured Settlement
Having understood the source of investment opportunity in structured settlements, it is equally essential to know the mechanism to be followed in order to buy a structured settlement annuity. Firstly, since the whole setup is brought into action via the legal machinery hence the purchasing party needs to abide by the course of action laid down by Congress in 2002. Since the selling of such settlement agreement requires court’s approval, the purchase of the same also requires consent of the court of law. Following is the brief process of the purchase of structured settlement annuity by the investors:
- Carefully analyzing the contracts of various clients. The investor must also be aware of the authentic companies that deal in such periodic payments settlements before agreeing to invest in any such annuity.
- The investor must then go through the various terms and conditions agreed upon by the original claimant and the scheme of payments decided upon in the settlement.
- The investor must contact a lawyer to go through the whole legal process smoothly which begins from presenting the offer of buying the structured settlement and ends with the court’s consent on the transfer of the structured settlement to the third party.
- The process ends with the investor paying the lump sum amount in order to receive the periodic stream of payments as per the structured settlement annuity.
Why Purchase Structured Settlement
There are many explicit and obvious advantages to the investor of purchasing a structured settlement annuity. They are as follows:
- Annual fixed stream of income from the annuity is guaranteed to the investor.
- Anybody can buy such an investment – individuals, a group of individuals, corporates etc.
- The insurance company backing this stream of annuities is generally highly rated by the credit rating agencies so purchase of this investment obviously has a negligible risk.
- Even if the original claimant party dies, the income to the investor will not be hampered. It will continue like any other normal returns from investment, with a lower risk of default!
- The whole stream if payments is insured or backed by the system of matching assets, that is, the original lump-sum received by the insurance company from the defendant is broken up into different investments and sold off to the investors, to ward off risk of default.
- The rate of returns is much higher than by any other form of regular investments.
- The whole process of acquiring the rights of structured settlement payments is done through the approval of the court and at no point of time the broker or any other party except for the investor can claim the right to any of the annual payments due to the investor.
Legal Aspects Related to Purchase of Structured Settlement
There is a lot of legal consent as well as legal advice involved in the process of buying of a structured settlement annuity thus; the investor must keep the following legal aspects in mind:
- The whole process of purchasing a structured settlement has to be enacted on the lines of the rules and procedural formalities laid down by the Congress, 2002 under which the order of purchase has to be sanctioned by law before it comes into force. All the reasons for the transfer of the structured settlement must comply with the New York’s current Structured Settlement Protection Act standards and requirements.
- Once the terms of receipt of the structured amount has been decided by the original claimant the structure of payments cannot be altered. So the terms of the payment in the original agreement may not fall in line with the needs of the investor.
- The structured settlement investment is just another financial product for the dealer/broker so it must be beneficial and profitable to him as well. This might imply that he may charge a high brokerage or commission for getting you the good deal.
- Depending on the state or country where this financial product is being offered for sale, the rules and laws may differ slightly. The investor must acquire complete knowledge of these settlement investments before striking a deal. Moreover, the investor may have to search for the best deal by going through the brochures of various companies that deal in structured settlements.
- These form of tailored settlements are not very widely agreed upon in all cased filed by the claimants so, there is limited opportunity to cautious investors to acquire fixed secured returns at high rates of interest. Moreover, though this form of investment has caught pace over time, still is has certain capacity constraints lest there should be arise in cases of structured settlement claims by law.
- In order to be eligible as a buyer of any such structured settlement investment, the basic requirement for the buyer to be a citizen of US, own a US passport and identification of citizenship in order to be able to purchase a structured settlement agreed upon by the original claimant in United States.
- When an investor buys a structured settlement, enjoys higher rate of return at almost no risk by waiting for the periodic payments. According to a US Court Order, the purchaser receives the right to get all the future payments and a safe compounded yield on his investment.
- Various organizations across US have sought to keep an eye on the purchase of structured settlement by companies who deal in them by buying it especially from the victims of physical injuries. These organizations include Consumer Federation of America, The National Spinal Cord Injury Association and the National Organization on Disability.