Structured settlement payments are a form of financial
compensation award whereby the payment is made as a series of periodic
payments rather than as a single payment upon receipt of the award. This
can take the form of significant payments when a beneficiary reaches a
certain age, such as a 21st birthday, or it could form smaller monthly
payments over many years or even decades. The payments are typically in
made in lieu of a successful personal injury or workplace compensation
award. They are often made when the beneficiary is a minor or otherwise
considered vulnerable, and may not be considered best able to manage
receipt of a large lump sum of money at a given time.
The terms of
structured settlements are negotiated between the parties at
commencement, and in some instances the financial priorities or needs of
the beneficiary will change over time. In the event the beneficiary
wants more or all of the funds in the payment plan earlier than
scheduled, they have the option of selling part or all of their future
payments in return for an immediate lump sum payment. A characteristic
of selling the periodic payments in return for a lump sum is that the
seller will not receive the full notional amount of the total payments.
For instance, if the award provided for a sum of $400,000 to be paid in
equal annual instalments over 10 years, if the beneficiary sold the
right to receive the payments soon after the award they may for instance
only receive a payment of $300,000.
When sold on the investment
markets, the right to receive the payments are known as structured
settlement investments. Essentially the investor is the party on the
other side of the trade from the seller. Inside the investment markets
they are considered to be Secondary Market Annuities, or SMA's. SMA's
are considered to offer comparatively high yields and low risk compared
to other annuity products. It should be appreciated that each SMA is
unique and the payments receivable are specific to the individual
structured settlement being purchased.
The higher yield payable
from these investments is not reflective of a greater risk, but is
rather reflective of lower liquidity. The terms of the payments were
tailored to the requirements of the beneficiary at the time of the
award, and often will not provide for equal periodic payments over long
periods of time as is typical with a conventional annuity. Participants
in these markets should also be aware that before they can be sold Court
approval is required, and the remit of the judge is to ensure the
beneficiary of the award is fully aware of the implications of the
transaction and that the terms of the sale are equitable to all
concerned.
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