Settlement Consulting Glossary
One of two main rating services which analyzes and rates the financial security of life insurance companies. According to Best’s, their financial strength rating is “an independent opinion, based on a comprehensive quantitative and qualitative evaluation, of a company’s balance sheet strength, operating performance and business profile.” Their top rating is A++”superior” with a financial size category of XV. The financial size category of XV means the company has at least $2,000,000,000.00 “adjusted policyholders’ surplus”.
An annuity is a life insurance product that is designed to turn a lump sum investment into a stream of income. It can be lifetime payments, payments for a certain period of time (period certain) or lump sum payments. It can also be a combination of all three. The payments can start immediately or be deferred.
An annuity contract is an agreement between the owner of the contract and the issuing life insurance company that provides for benefit payments to be made to at least one annuitant or payee. The contract may be for a fixed period of time or for a period of time contingent upon an annuitant’s life. For example, the contract might specify that the issuer of the contract will pay the annuitant of the contract monthly benefits starting of $1,000 per month and increasing by four percent at each anniversary of the contract for either a fixed number of years or the remainder of the annuitant’s life. Either the annuitant, or someone on the annuitant’s behalf, will have paid (at least) an immediate single lump sum premium to the issuer to initiate this flow of payments.
An annuity issuer is a life insurance company that issues an annuity policy in a structured settlement transaction.
Annuitant (measuring life)
An annuitant is the person that will receive or is entitled to receive annuity payments and who is the measuring life for a life annuity. In the case of personal injury settlements, the annuitant is the injury victim and/or other persons who have claims.
The assignee is an entity who accepts from the assignor a legal obligation to make future periodic payments via a structured settlement annuity. This is accomplished as part of the qualified assignment process.
A person or company who has a legal obligation to make future periodic payments via a structured settlement annuity that they want to assign to a 3rd party (assignor). In most cases, the assignor would be the defendant or its insurance company. This is accomplished as part of the qualified assignment process.
Typically these are special purpose companies. However, they can be a life insurance company. Many times an assignment company is a wholly owned company of an annuity issuer (the company that makes the annuity payments). In a structured settlement transaction, the assignment company has the
Attorney Fee Structure Annuity
An annuity set up for an attorney as part of the settlement of a case where an attorney is owed a contingent legal fee. It is a pre-tax and tax deferred investment vehicle only for attorneys. Payments from an attorney fee structure annuity may be made in any form an annuity typically can provide.
The person or persons designated to receive the remaining guaranteed payments from an annuity. In the case of a structured settlement, the beneficiary or beneficiaries receives the payments income tax free. However, there can be estate tax implications when the annuitant passes away.
The “field rates” life insurance companies provide to insurance professionals or professionals that offer structured settlements for pricing of annuities. In some cases, a daily rate may be obtained from a life insurance company which is better than book rates.
Certain and Life Annuity
An annuity payable for life but with a certain number of years guaranteed. This is commonly referred to as a C&L and is usually preceded by a number such as 20. In the case of a 20 C&L, you have a life annuity with a 20 year guarantee. The first twenty years are guaranteed and after the first twenty years the payments become life contingent. If the annuitant dies in year five with a 20 C&L, the payments would be made for the remaining 15 guaranteed years to the beneficiary.
The compensation paid by a life insurance company for the sale of an annuity. The commission for structured settlements is 4%. The 4% does not come out of the money being placed into the structured settlement annuity, instead it the life insurance company the structured settlement is purchased from pays the commission out of its own assets.
This is a provision that can be added to a structured settlement annuity so that at the death of the annuitant, the beneficiary gets a lump sum payment instead of the continuation of the annuity payments. An annuitant must chose this option at the time of settlement and must select a percentage of the payments to be commuted which can be from 1% – 100%. The life insurance company charges a fee for this option which typically is in the form of a reduced payout to the beneficiary. The typical cost is 5% to 6%.
A tax doctrine that provides income although not actually reduced to a taxpayer’s possession is constructively received by him in the taxable year during which it is credited to his account, set apart for him or otherwise made available so that he may draw upon it at any time. Income is NOT constructively received if the taxpayer’s control of its receipt is subject to substantial limitations or restrictions.
Cost of Living Adjustment (COLA)
A COLA is a feature that can be added to annuity whereby the annuity payments increase at a fixed percentage every year. When this feature is added, the annuity payments compound at a certain percentage every year. For example, the payments could compound at 3% per annum.
A special form of pricing for structured settlement annuities based on the daily market conditions. The daily rate could be better than book rates or could be worse. Typically a daily rate is only valid for 24 hours. Certain companies will only provide a daily rate quote after you pass a certain investment threshold ($250,000 is standard) and some require a daily rate after you exceed a certain investment threshold ($1,000,000 is standard).
A deferred annuity is an annuity whose payments do not start immediately. Normally, this annuity is considered a retirement vehicle and is subject to a 10% tax penalty for withdrawals prior to age 59 ½. However, structured settlement annuities are exempt from this rule.
A discount rate is an interest rate that is used to “discount” the value of future expected payments to present value. In effect, a discount rate removes the future interest that a present value sum would earn until a future payment would be expected. If a stream of future payments of $1,000 per year for ten years is “discounted” to present value, the value will be significantly less than $10,000. If that present value is invested in securities with an interest rate that is used as the discount rate, the fund will make scheduled payments, but attract interest on the remaining balance. Over the term of the stream of future payments, the accumulation of interest at the discount rate will provide the fund with monies needed to make all scheduled payments.
Factoring is the process of selling the rights to receive future payments from a structured settlement annuity. Federal and state laws govern these transactions and mandate a court approval process.
The guaranteed benefits are annuity payments that are made regardless of whether the measuring life (annuitant) is alive or dead.
A growth rate is a percentage rate at which a series of payments is projected to increase. It is conventional to project growth rates in annual terms such that a growth rate for wages of five percent would mean that wages would become five percent larger each year. Growth rates might exist for costs in a life care plan, wages, job-related fringe benefits, the Consumer Price Index (CPI) and many other economic variables.
Inflation rate is the rate of decrease in the purchasing power of money.
Inflation risk is the risk that the inflation rate will turn out to greater than the rate of inflation that was forecast, either explicitly or implicitly, in a projection of the stream of future payments. In an explicit projection, the stream of future values is projected at a specified rate of increase, which either is the rate of inflation or directly depends on the rate of inflation, as would be the case with wage growth. If the rate of inflation is greater than forecast, there will be a loss in purchasing power in the payments that will be made. In an implicit projection, a real discount rate or a net discount rate implies a relationship between the rate of inflation and the discount rate. If the rate of inflation increases more rapidly than the forecast of that relationship implies, there is a risk of loss in real purchasing power. Unlike default risk, however, inflation risk has both positive and negative sides. If the rate of inflation is forecast too high, either explicitly or implicitly, there will be gains in purchasing power in the stream of payments.
Internal Rate of Return (IRR)
The IRR is the interest rate equivalent of annuity payments over time.
Internal Revenue Code (IRC)
The IRC is the set of laws that govern the tax system in the United States and is commonly referred to as the tax code.
This provision of the Internal Revenue Code exempts from gross income personal physical injury recoveries whether paid in a lump sum or future periodic payments.
This provision of the Internal Revenue Code allows qualified assignments to third parties who take on the obligation to make future periodic payments to persons having claims for personal physical injuries or sickness.
This provision of the Internal Revenue Code requires that all structured settlement factoring transactions be approved by a state court, in accordance with a qualified state statute. Qualified state statutes must make certain baseline findings, including that the transfer is in the best interest of the seller, taking into account the welfare and support of any dependents. Failure to comply with these procedures results in the factoring company paying a punitive excise tax of 40% on the difference between the value of the future payments sold and the amount paid to the person who wanted to sell.
Joint Life Annuity (Joint & Survivor)
This is a form of annuity where instead of just one measuring life, there are two. It is most commonly used in the case of a husband and wife so that payments continue for as long as both spouses are alive. In the case of a structured settlement annuity, both spouses must have legal claims in order to set it up in this way. The main drawback to setting up a joint life annuity in the case of married couples is that if the couple divorces, the annuity is still a joint life annuity. It can be undone. In addition, in cases that involve a rated age the discount one gets on the pricing of annuity with a rated age is reduced since the uninjured person will have a much longer life expectancy in most cases.
A life annuity is an annuity whose payments are made for the annuitant’s (measuring life) lifetime regardless of how long that person lives. Typically life annuities are coupled with a guarantee so that if the annuitant dies prematurely, the annuity payments would continue to their beneficiary for some period of time. This is called a certain and life annuity. However, you can have a life only annuity that pays out only for as long as the annuity is alive.
Life Care Costs
Life care costs include both medical and non-medical costs an individual will bear in the future because of a catastrophic personal injury. Such costs may include medications, medical treatments, rehabilitation training, special education, special housing requirements, special vehicle requirements, personal attendant care and similar types of expenses made necessary because of an injury.
Life Contingent Benefit
Life contingent benefits are annuity payments that are made only if the measuring life (annuitant) is alive.
Life & Health Insurance Guaranty Association
According to the National Organization of Life & Health Insurance Guaranty associations, “guaranty associations were created to protect state residents who are policyholders and beneficiaries of policies issued by a life or health insurance company that has gone out of business. All 50 states, the District of Columbia, and Puerto Rico have life and health insurance guaranty associations. All insurance companies (with limited exceptions) licensed to write life and health insurance or annuities in a state are required to be members of the state’s life and health insurance guaranty association. If a member company becomes insolvent (goes out of business), the state guaranty association obtains money to continue coverage and pay claims from member insurance companies writing the same line or lines of insurance as the insolvent company.”
Life Insurance Company
A life insurance company is a financial services company that provides life insurance and annuities.
Life Insurance Rating Services
There are companies that rate the financial strength of insurance companies. The two most commonly referred to services are A.M. Best and Standard & Poor’s (S&P).
A “Life Table,” or “Mortality Table” is a table providing a listing of the number of individuals expected to remaining alive out of a birth base of 100,000 individuals. The table may be broken down by sex or race, to reflect cohorts, but it will, at a minimum, show the number of individuals surviving and dying at each year of age starting from age 0 and continuing to an advanced age, now usually age 100 or 120. [The tables may be “static” in the sense that they rely exclusively on past experience or “cohort” in the sense that they attempt to project the number of survivors likely to exist in the future.]
Lump Sum Annuity
Every life insurance company that provides structured settlement annuities has a “sweet spot” for benefits they like to sell. By taking advantage of this, one can build a structured settlement plan that maximizes the benefits for an injury victim by using several companies to take advantage of the arbitrage that exists.
A type of settlement trust that is sometimes created to hold monies designed to pay for future medical care. Typically these trusts are professionally managed and cost containment services are included.
Medicaid provides basic health care coverage for those who cannot afford it. It is a state and federally funded program run differently in each state. Eligibility requirements and services available vary by state. However, this benefit is always income and asset sensitive so it can be lost by receiving too much settlement money.
Medicare is a federal health insurance program that provides benefits based on age or disability. It is an entitlement and is not income or asset sensitive.
Medicare Set Aside
Process by which a Medicare recipient or a potential future Medicare recipient, sets aside a portion of their settlement for future Medicare covered expenses and spends that set aside only on Medicare covered expenses for the injury related care. Once exhausted, Medicare pays for the future injury related care and never looks to the settlement again.
Non-Qualified Assignment (NQA)
A NQA is a document that makes an assignment of the obligation to make future periodic payments as part of a settlement. The document is entered into by the assignor (party making the assignment) and the assignee (party accepting the obligation). A non-qualified assignment, as opposed to a qualified assignment, is used for settlements that don’t fall within the definition of personal physical injuries under IRC 104(a). Examples of these cases are age discrimination, ADA violations, race discrimination, wrongful termination, sexual harassment among others. In addition, a non-qualified assignment may be used for the sale of highly appreciated property, businesses or divorce settlements. Typically, these transactions when done properly result in annuitant being able to have the money put into an annuity pre-tax and tax deferred. Non-qualified assignments are sometimes used for certain workers’ compensation settlements and attorney fee structures as well.
Normal Life Expectancy (NLE)
This is a term used to refer to the remaining amount of time someone is expected to live from a point in the past or from today. Every life insurance company has their own life expectancy tables based upon their own data accumulation. In addition, there is a US life expectancy table available as well.
The person entitled to receive annuity payments from a structured settlement. This would be the annuitant or measuring life until that person passes away and then the payee would be the beneficiary.
Period Certain Annuity
A period certain annuity is an annuity whose payments are made for a certain period of time and then stop. For example, a 10 year period certain annuity would pay out for 10 years and then cease. All of the payments for a period certain are guaranteed and none are life contingent.
In financial theory, present value is a sum of money today which would exactly replace a stream of payments from the past or from the future, based on an assumed discount (interest) rate or set of rates. If the interest rate is presumed to be 10 percent, a sum of $1000 today will be worth $1100 at the end of one year (10 percent of $1000 is $100). In that sense, $1000 is the present value of $1100 one year from now. The actual process depends on the period over which compounding takes place, but $1000 today would be worth $1100 in one year and $1210 in two years. The extra $10 in the second year is $10 in interest on the interest from the first year. Thus, with annual compounding, $1000 is the present value of $1210 at the end of two years. In law, there is often a prohibition against pre-trial interest. As a result, what is called “present value” in litigation is often a combination of past actual value, but future present value. In the true financial sense of “present value,” interest must be added to past losses and subtracted from future losses.
A type of trust authorized by Federal Law whose assets don’t count for purposes of qualifying for needs based public assistance (Medicaid or SSI). With a pooled trust, the trustee is a nonprofit or charity. The funds in the trust are “pooled” for investment purposes, but each member of the pooled trust has a separate account. The pooled trust retains the money left in the trust at the death of the member of the pooled trust which avoids the requirement for special needs trusts that Medicaid be repaid at death.
Qualified Assignment (“QA”)
A “QA” is a transfer of the legal obligation to make future periodic payments as damages for personal physical injury or sickness from a lawsuit defendant to a life insurance assignment corporation. This is done pursuant to Section 130 of the Internal Revenue Code. A qualified assignment can be used if all of the following requirements are met 1) the transferee assumes the liability from a person who is a party to the suit or agreement; 2) the periodic payments are fixed and determinable regarding amount and time of payment; 3) the periodic payments cannot be accelerated, deferred, increased, or decreased by the recipient of such payments; 4) the assignee’s obligation is no greater than the obligation of the person who assigned the liability; and 5) the periodic payments tax-free to the recipient under section 104(a)(2).
Qualified Funding Asset
A qualified funding asset is an asset that may be purchased by an assignment corporation as part of a qualified assignment transaction under Section 130 of the IRC. The qualified funding asset, typically an annuity, is how the assignment corporation makes the payments it is obligated to make under the qualified assignment. If an annuity is not used as the qualified funding asset, the only other option is obligations of the United States Government (Treasury Bonds).
Qualified Settlement Fund (468B)
A temporary trust that can be created to hold settlement proceeds while settlement planning decisions are made. Monies put into this trust are NOT constructively received by the injury victim and a structured settlement with a qualified assignment may be done. These trusts are typically created to deal with complex settlement planning issues such as resolving allocation issues, multiple layers of coverage and aggregating settlement money, liens needing to be resolved, preserving public benefits like Medicaid or SSI and structured settlements. A court must create the trust and a professional trustee holds the funds until all money is disbursed. These trusts are governed by the Treasury Regulations.
This is a discount provided by life insurance companies that offer structured settlement annuities. It means that the annuitant or measuring life has reduced life expectancy due to medical conditions or medications they take. Shorter life expectancy means reduced cost for lifetime annuity benefits. The older you are, the cheaper lifetime benefits are because the life insurance company will not have to pay as long. For example, a life annuity for a 20 year old is much cheaper than a life annuity for a 50 year old. However, a 20 year old could have a rated age of 50 which means the annuity can be priced as if that 20 year old was 50.
A product used in Pre-August of 1997 workers’ compensation settlements. The transaction is similar to a qualified assignment, but different in the way it is documented. A Reinsurance agreement is executed whereby the life insurance company assumes the carrier’s liability to make the future payments to the claimant. Specific language is included in the Joint Petition to ensure the tax-free status of the payments.
Secured Creditor Status
When an assignment is done as part of a structured settlement transaction, the annuitant is a general creditor of the assignment company. However, with a Qualified Assignment Release and Pledge Agreement an annuitant can get secured creditor status. What this means is the annuitant only stands behind the government in terms of getting at assets in the case of insolvency.
Settlement Agreement & Release (“SAR”)
A SAR is a legal document that is created when a lawsuit is settled to memorialize the terms of the settlement. When a structured settlement is utilized, the document will reflect the terms of the payout. There is required language that must be a part of this document if a structured settlement is done.
Settlement Asset Management Trust (SAM-Trust)
A SAM-Trust is typically an irrevocable spendthrift trust created for injury victims to protect their settlement proceeds.
Single Premium Immediate Annuity
An annuity purchased with a single premium and an immediate payout.
Single Premium Deferred Annuity
An annuity purchased with a single premium and a deferred payout.
Special Needs Trust
A trust that can be created pursuant to Federal Law whose assets do not count for purposes of qualifying for needs based benefits such as Medicaid or SSI. Typically, a professional trustee (a trust company or bank) manages the money in the trust and makes distributions for the benefit of the trust beneficiary. The money can only be used for the sole benefit of the trust beneficiary. There are substantial limitations on how the money can be used. At death, whatever is left in the trust goes to Medicaid to repay for any medical care provided. However, if anything is left after Medicaid is repaid, family members or the designated beneficiary may receive what is left over.
Standard & Poor’s (S&P)
One of the two most commonly referred to rating services for financial security of life insurance companies. According to S&P, they “evaluate the issuer’s ability and willingness to repay its obligations in accordance with the terms of those obligations. To form its ratings opinions, Standard & Poor’s reviews a broad range of financial and business attributes that may influence the issuer’s prompt repayment.” S&P’s top rating is AAA “extremely strong capacity to meet financial commitments”.
Supplemental Security Income (SSI)
SSI is a cash assistance program administered by the Social Security Administration. It provides financial assistance to needy aged, blind, or disabled individuals. To receive SSI, the individual must be aged (sixty-five or older), blind or disabled and be a U.S. citizen. The recipient must also meet the financial eligibility requirements.
Social Security Disability Income (SSDI)
SSDI is a cash assistance program only for those that are disabled under Social Security’s’ definition and have paid in enough “quarters” into the system. SSDI benefits are an entitlement and are not income or asset sensitive. The SSDI benefit program is funded by the workforce’s contribution into FICA (social security) or self-employment taxes. Workers earn credits based on their work history and a worker must have enough credits to get SSDI benefits should they become disabled.
Structured Settlement Annuity
A structured settlement is a special type of annuity purchased by the defendant in a personal injury law suit to pay the annuitant (injury victim) future periodic payments. The payments are tax-free under the Internal Revenue Code and have certain creditor/judgment protections. There are many types of payment plans that can be designed for injury victims depending on their needs or the needs of their families.
Temporary Life Annuity
A temporary life annuity is an annuity that pays only for life and only for a limited period of time. This is not used very frequently. However, it is used sometimes as a funding mechanism for Medicare Set Asides to get the payments to equal the exact Medicare Set Aside Allocation.
A trust is a legal document created by an attorney that tells a trustee (trust company or bank) what to do with the trust assets. Trusts can be revocable or irrevocable. Settlement trusts often contain spendthrift provisions to protect an injury victim from dissipating their money too quickly. Trusts offer, under most state law, some creditor and judgment protection. Investment gains from assets held in trust are taxable generally and the rate at which they are taxed is dependent on the type of trust.
A trust company takes on the obligation of being a trustee and manages assets for trust beneficiaries. A trustee owes a very high duty to a trust beneficiary. These companies typically charge a yearly fee for managing the assets in the trust.