Glossary of Structured Settlement Terms
A reference guide to terms commonly used in structured settlement law, transfer proceedings, and the secondary market.
Applicable Federal Rate (AFR)
A rate published monthly by the Internal Revenue Service under IRC § 1274(d), used in many state SSPAs to calculate the discounted present value of future structured settlement payments. The AFR is based on the average market yield on outstanding U.S. Treasury obligations.
Annuity Issuer
The insurance company that issued the annuity contract funding the structured settlement. The annuity issuer is responsible for making periodic payments to the payee (or to the assignment company, which then pays the payee). Common issuers include MetLife, Pacific Life, Prudential, and New York Life.
Assignment Company (Qualified Assignment)
An entity that assumes the periodic payment obligation from the original defendant under a qualified assignment agreement, as defined in IRC § 130. The assignment company purchases an annuity to fund the payments and is typically an interested party in any transfer proceeding.
Best Interest Standard
The judicial standard that must be satisfied for a court to approve a structured settlement transfer. The court must find that the proposed transfer is in the best interest of the payee, taking into account the welfare and support of the payee’s dependents. This is the central requirement of all state SSPAs.
Discount Rate
The interest rate used to calculate the present value of future payments. In the secondary market, the discount rate represents the return the purchasing company earns on the transaction. Higher discount rates result in lower lump-sum amounts for the payee. Market discount rates typically range from 7% to 18%.
Discounted Present Value
The current dollar value of a series of future payments, calculated by applying a discount rate to each payment to account for the time value of money. State SSPAs generally require the discounted present value to be calculated using the Applicable Federal Rate and disclosed to the payee.
Effective Equivalent Interest Rate
The annualized rate of interest on the net advance amount, calculated as if the transferred payments were installment payments on a loan. This rate shows the payee the effective cost of the transaction. California and several other states require this rate to be prominently disclosed.
Excise Tax (26 U.S.C. § 5891)
Federal law imposes a 40% excise tax on any person who acquires structured settlement payment rights in a factoring transaction, unless the transfer is approved by a court or responsible administrative authority under a qualified state SSPA. This provision creates a strong incentive for purchasing companies to obtain court approval.
Factoring Company
A company that purchases structured settlement payment rights from a payee in exchange for a lump sum of cash. Also referred to as a structured settlement purchase company (SSPC) or transferee. The factoring industry emerged in the early 1990s.
Independent Professional Advice (IPA)
Advice from an attorney, CPA, actuary, or other licensed professional regarding the legal, tax, and financial implications of a proposed transfer. The advisor must be engaged by the payee (not the transferee) and cannot have a financial interest in the transfer. Most SSPAs require that the payee be advised of the right to seek IPA; some states, like California, require the transferee to pay up to $1,500 for the payee’s IPA costs.
Interested Parties
Persons or entities with continuing rights or obligations under the structured settlement who must be notified of a proposed transfer. Typically includes the payee, any irrevocably designated beneficiaries, the annuity issuer, the structured settlement obligor, and the assignment company. Proper notice to all interested parties is a prerequisite for court approval.
Life-Contingent Payments
Structured settlement payments that are conditioned on the payee being alive at the time of each payment. If the payee dies, payments cease. These differ from “period certain” payments, which are payable regardless of the payee’s survival. Transfers of life-contingent payments present additional complexity, particularly regarding the purchaser’s risk exposure.
Payee
The individual who is entitled to receive periodic payments under a structured settlement agreement. In a transfer proceeding, the payee is the person selling their future payment rights in exchange for a lump sum.
Period Certain Payments
Structured settlement payments that are guaranteed for a fixed number of years regardless of the payee’s survival. If the payee dies during the period, remaining payments go to a designated beneficiary or the payee’s estate. These are generally easier to transfer than life-contingent payments.
Structured Settlement Protection Act (SSPA)
A state statute that governs the transfer of structured settlement payment rights. All 50 states and the District of Columbia have enacted SSPAs. While SSPAs vary by state, they generally require written disclosures, court approval, and a judicial finding that the transfer is in the payee’s best interest. Many states’ SSPAs are modeled on the National Conference of Insurance Legislators (NCOIL) or the National Conference of Commissioners on Uniform State Laws (NCCUSL) model acts.
Structured Settlement Purchase Company (SSPC)
A company registered or operating as a purchaser of structured settlement payment rights. Some states require SSPCs to formally register and post surety bonds before conducting business. See our registration requirements guide for state-specific rules.
Surety Bond
A bond required by some states as a condition of SSPC registration. Typically $50,000, the bond protects payees against losses resulting from the company’s failure to comply with state law. The bond remains in effect for a period after the registration expires (e.g., 3 years in Nevada).
Transfer Agreement
The contract between the payee and the transferee (purchasing company) under which the payee agrees to sell specified structured settlement payment rights in exchange for a lump sum. The transfer agreement must comply with state SSPA requirements and is not effective until approved by a court order.
Transferee
The party acquiring structured settlement payment rights from the payee. In practice, the transferee is the factoring company or SSPC.
Note: This glossary is provided for informational purposes only and does not constitute legal advice. Definitions may vary by jurisdiction. Consult a licensed attorney for advice specific to your situation.
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