Industry terms

Annuitant

Individual entitled to receive annuity payments.

Annuity

An investment vehicle that pays a fixed stream of payments over a specified amount of time.

Broker

An individual who facilitates the purchase of an annuity from an insurance company.

Broker Relationship System 

The process of securing clients through referrals from brokers, attorneys, and other financial professionals who already want to secure the best interests of the clients. Relationship marketing is more cost efficient, and usually increases the payment to the seller. Since it is based on mutual trust between professionals, it also helps assure professional and ethical behavior.

Cooling Off Period

Statutory time that an annuitant must wait before they can enter into a factoring transaction. The waiting period varies from state to state. Factoring a transaction wherein an individual with rights to receive future periodic payments (often in the form of a structured settlement annuity) accepts a lump sum amount in lieu of the scheduled future payments.

Discount Rate

Interest rate used to compute the present value of future cash flows.

Dissipation

The spending down or squandering of money.

Factoring

A transaction wherein an individual with rights to receive future periodic payments (often in the form of a structured settlement annuity) accepts a lump sum amount in lieu of the scheduled future payments. Interest rates are used to compute the present value of future cash flows.

Guardian Ad Litem

A temporary guardian appointed by the court to represent the interest of a person whose legal status or mental state may call into question that person’s ability to make competent decisions with respect to civil litigation. A guardian has the legal authority and duty to care for the personal and property interests of another person.

IRC Section 5891

A section of the Internal Revenue Code enacted as a penalty tax on factoring transactions that do not strictly comply with its requirements - which include complying with state consumer protection laws governing factoring and obtaining court approval of the terms of the transaction. Transactions which do not comply with the term of this settlement incur a 40% tax penalty.

Liquidity

The ability to readily convert an asset into cash.

Lump Sum

Money paid out in a single occurrence or installment.

Means Tested

The test limiting certain government assistance programs to persons who can demonstrate financial need. Means testing usually includes tests for the amount of assets and the amount of income.

Present Value

The current value of a future sum of money or periodic payment. Due to the time value of money, the dollar amount of the future payment will be discounted enough for the buyer to receive its required rate of return.

Purchasing Power

The amount of goods or services that can be purchased with a given amount of money. A person can lose purchasing power if income stays the same but the cost of goods or services goes up.

Qualified Assignment

A defendant or insurance company may “assign” their burden to make future payments in a settlement or judgment to another company. The assignment is “qualified” if it meets the requirements to secure favorable tax treatment set out in IRC §130. The assignment company then purchases an annuity contract from a life insurance company which will actually make the future periodic payments to the claimant.

Secondary Market

Another name for the factoring industry. The primary market for structured settlements refers to the purchase of annuity contracts from insurers. The secondary market refers to the marketplace wherein those future annuity payments are sold.

Settlement Planning

A specialty within financial planning that focuses on helping plaintiffs make decisions regarding the allocation of settlement proceeds. The function is often performed by structured settlement brokers.

Structure

Colloquialism referring to a structured settlement annuity. A structured settlement annuity refers to a life insurance contract that funds future payments promised in settlement of a legal dispute.

Structured Settlement

An arrangement (usually funded with an insurance contract) wherein a claimant agrees to spread the money received in a settlement over a period of time as opposed to a single lump sum.

Time Value of Money

The fact that money is worth more today than the same amount of money would be if received in the future. This is due in part to the gradual rise in prices over time and the corresponding loss in purchasing power. The ability to earn a rate of return and a general time preference also help explain this time value.