Structured settlement payments are a form of financial compensation award in which the payment is made as a series of periodic payments rather than a one-time payment upon receipt of the award. This can take the form of significant payments when a beneficiary reaches a certain age, such as when they turn 21, or it could take the form of smaller monthly payments over many years or even decades. Payments are generally in lieu of successful compensation for personal or workplace injuries. They are often made when the beneficiary is underage or considered vulnerable, and may not be considered best suited to manage the receipt of a large lump sum of money at any one time.
The terms of structured settlements are negotiated between the parties at the outset, and in some cases, the beneficiary’s priorities or financial needs will change over time. In the event the beneficiary wants more or all of the payment plan funds ahead of schedule, they have the option to sell some or all of their future payments for an immediate balloon payment. One feature of selling the periodic payments for a lump sum is that the seller will not receive the full notional amount of the lump sum payments. For example, if the award provided for a sum of $400,000 to be paid in equal annual installments over 10 years, if the beneficiary sold the right to receive the payments shortly after the award, for example, they can only receive a payment of $300,000.
When they are sold in the investment markets, the right to receive the payments is known as structured settlement investments. Essentially, the investor is the party on the other side of the trade from the seller. Within the investment markets they are considered Secondary Market Annuities, or SMA’s. SMAs are considered to offer comparatively high returns and low risk compared to other annuity products. It should be noted that each SMA is unique and payments receivable are specific to the individual structured settlement being purchased.
The higher yield payable on these investments does not reflect higher risk, but rather lower liquidity. Payment terms are tailored to the beneficiary’s requirements at the time of award and often do not provide for equal periodic payments over long periods of time, as is typical in a conventional annuity. Participants in these markets should also be aware that court approval is required before they can be sold, and the judge’s mandate is to ensure that the recipient of the award is fully aware of the implications of the transaction and that the terms of the sale are fair to all concerned.
