Structured Settlement Glossary

Plain-English definitions of the terms you meet when you receive, or think about selling, structured settlement and annuity payments.

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Annuity: A financial contract that provides a series of periodic payments over a set period of time or for life.
Annuity issuer: The life insurance company that issues the annuity funding a structured settlement. It usually sends the payments, and it must be notified when a court approves a transfer of payment rights.
Annuity owner: The party that owns the annuity contract. In a structured settlement this is usually the assignment company, not the injured person, who receives the payments but does not own the annuity.
Assignment company: The company that takes over the duty to make structured settlement payments from the defendant or its insurer in a qualified assignment. It is usually an affiliate of a life insurer and owns the annuity that funds the payments.

Balloon payment: A balloon payment is a much larger payment due at the end of a payment schedule, after smaller payments have been made earlier. In structured settlements, it means a later payment that is bigger than the ones before it.
Best interest standard: It means a court must decide that selling structured settlement payments is in your own best interest, while also considering the welfare and support of your dependents.

Court approval: A court approval is a judge's final decision allowing a structured settlement transfer to go forward after deciding it is lawful and in the payee's best interest.

Disclosure statement: A disclosure statement is the written information a buyer must give you before you sell structured settlement payments, so you can review the terms, the lump sum offered, and any costs or discounts before asking a court to approve the transfer.
Discount rate: The rate used to reduce future structured settlement payments into a smaller lump sum today. It shows how much less a buyer pays than the total future payments.

Effective annual rate: The effective annual rate is the yearly cost implied by a lump-sum offer compared with the payments you give up, once the discount is translated into an annual rate. It shows how expensive the offer is over time.

Factoring company: A company that buys some or all of a person’s future structured settlement payments for a lump sum that is less than the total payments.

Guaranteed payments: Payments that will be made for a set period or amount whether or not the payee is still alive. If the payee dies, the remaining payments go to a named beneficiary or the estate.

Independent professional advice: Advice from an attorney, accountant or other licensed professional who is not connected to the buyer. Many state protection acts require that sellers be advised to get it, and some require it outright.

Life-contingent payments: Payments that depend on whether the person receiving them is still alive. If the recipient dies, the remaining payments usually stop unless the settlement says otherwise.
Lottery annuity: A lottery annuity is a series of future lottery prize payments paid over time instead of all at once. The winner usually receives fixed installments funded by an annuity.
Lump sum: A single one-time payment instead of a series of future periodic payments, often offered when someone sells structured settlement payments to a buyer.

Medicare set-aside: A Medicare set-aside is money reserved from a settlement to pay future Medicare-covered injury-related medical costs before Medicare will pay. It helps show that settlement funds for care are set apart, not spent on other needs.

Partial sale: Selling only some of your structured settlement payments instead of all of them. You receive a lump sum for the payments sold, and the amount is less than their total future value.
Payee: The person who is entitled to receive structured settlement payments is the payee. If payments are sold, the payee is the person whose rights are being transferred, usually with court approval.
Period certain: A period certain is the guaranteed time span during which structured settlement payments must continue, even if the injured person dies before that period ends.
Present value: What a series of future payments is worth in today's money at a chosen discount rate. The higher the rate, and the further away the payments, the lower the present value.
Purchase agreement: An agreement where a buyer pays you a lump sum now in exchange for some or all of your future structured settlement payments.

Qualified assignment: A qualified assignment is when a company legally takes over the duty to make structured settlement payments and funds that duty with a qualified asset, usually an annuity, so the original payer is released from that obligation.
Qualified order: A court-approved order that lets a transfer of structured settlement payment rights happen legally before the sale closes, after finding the transfer is allowed and in the payee’s best interest.

Section 104(a)(2) exclusion: It is the tax rule that lets damages for personal physical injury or physical sickness be excluded from gross income, whether paid all at once or over time.
Section 130 qualified assignment: A company accepts the duty to make periodic personal injury payments from the original payer and, if it uses a qualified funding asset like an annuity, can exclude the amount it receives for taking on that duty from income.
Section 5891 excise tax: A federal tax equal to 40 percent of the factoring discount, charged to a buyer of structured settlement payments unless a court approved the transfer in advance in a qualified order.
Settlement planner: A professional, also called a structured settlement broker, who helps an injured person and their attorney design the payment schedule and choose the annuity when a case settles.
Special needs trust: A special needs trust is a trust set up to hold money for a person with disabilities without usually counting that money as the person’s own for benefit purposes.
Structured settlement: A structured settlement is a way of receiving damages as a series of scheduled payments over time, often from a personal injury claim, instead of as one lump sum.
Structured settlement protection act: State laws that require a court to approve the sale of structured settlement payments to ensure the transfer is in the best interest of the payee.

Transfer petition: The court filing, usually prepared by the buyer, that asks a judge to approve the sale of structured settlement payments. The court reviews it under the state's protection act before the transfer can take effect.