Definitions
Structured Settlement
A financial arrangement where a claimant receives periodic payments over time instead of a lump sum, typically resulting from a personal injury lawsuit or insurance claim. These payments are tax-free under IRC Section 104(a)(2) and provide long-term financial security.
Factoring Transaction
The legal process of selling future structured settlement payments to a third-party company in exchange for a lump sum of cash. This requires court approval in all states under the Structured Settlement Protection Acts.
Discount Rate
The percentage used to calculate the present value of your future payments. A higher discount rate means you receive less money. Rates typically range from 9% to 18%, significantly impacting your payout.
Present Value
The current worth of your future structured settlement payments, calculated using a discount rate. This represents what your future payments are worth in today's dollars.
Annuity
An insurance product that funds structured settlement payments. The annuity guarantees periodic payments for a specified term or lifetime, backed by highly-rated insurance companies.
Court Approval
Mandatory legal requirement for selling structured settlement payments. A judge reviews the transaction to ensure it's in your best interest, considering your current financial situation and reasons for selling.
Best Interest Finding
The legal determination a judge must make that selling your structured settlement payments serves your best interest. Courts consider financial need, payment adequacy, and alternative options.
Independent Professional Advice (IPA)
Counsel provided by an attorney or financial advisor who is not affiliated with the purchasing company. Many states require IPA to protect consumers from making uninformed decisions.
Qualified Assignment
An agreement where the original defendant's payment obligation is transferred to a third party (usually a life insurance company), ensuring tax-free treatment of settlement payments under IRC Section 130.
Periodic Payment
Regularly scheduled installment payments from your structured settlement, which may be monthly, quarterly, annually, or on a custom schedule designed to meet your specific needs.
Lump Sum
A single, immediate payment of cash received when selling structured settlement rights, as opposed to receiving smaller payments over time. The lump sum is always less than the total future value.
Life Contingent Annuity
An annuity that makes payments for as long as the recipient lives. Payments cease upon death, with no remaining value for beneficiaries unless a guaranteed period is included.
Period Certain Annuity
An annuity that makes payments for a specified number of years regardless of whether the recipient lives or dies. If death occurs early, remaining payments go to beneficiaries.
IRC Section 104(a)(2)
Internal Revenue Code provision that excludes structured settlement payments for physical injury or sickness from federal income tax. This tax advantage is a key benefit of structured settlements.
IRC Section 130
Internal Revenue Code provision allowing defendants to transfer structured settlement payment obligations to a third party while maintaining the tax-free status of payments.
Structured Settlement Protection Act (SSPA)
Federal and state laws requiring court approval for structured settlement transfers, established to protect consumers from predatory practices and ensure informed decision-making.
Transfer Agreement
The legal contract between you and the purchasing company that specifies which payments you're selling, the purchase price, and all terms and conditions of the transaction.
Obligor
The party responsible for making structured settlement payments, typically an insurance company that purchased the annuity from the original defendant in the personal injury case.
Payee
The person entitled to receive structured settlement payments. As the payee, you have the right to sell some or all of your future payments, subject to court approval.
Partial Sale
Selling only a portion of your structured settlement payments while retaining others. This strategy provides immediate cash while maintaining some future income security.
Full Sale
Selling all remaining structured settlement payments in exchange for a single lump sum. This option provides maximum immediate cash but eliminates all future payment income.
Advance Notice Requirement
Legal requirement that consumers receive advance written notice (typically 10-15 days) before completing a structured settlement sale, allowing time to reconsider the decision.
Settlement Agreement
The original legal document from your personal injury case that established your structured settlement and defined the payment schedule, amounts, and terms.
Funding Company
A company that purchases structured settlement payment rights. Also known as factoring companies, these businesses profit from the difference between what they pay you and the actual value of payments.
A.M. Best Rating
Independent credit rating of insurance companies' financial strength. Structured settlements should be funded by insurers with A- or better ratings to ensure long-term payment security.
Need help understanding your settlement?
Chat with Mint for clear explanations of these terms, or get a no-obligation quote when you are ready.